EUR/GBP Downside Risk as ECB Meets

EUR/GBP price, news and analysis:

• Trading in EUR/GBP will be dominated near-term by this session’s monetary policy announcement by the European Central Bank and its President’s news conference.
• The ECB and President Christine Lagarde will likely remain dovish and that could weaken EUR/GBP and other Euro crosses.

EUR/GBP at risk of sliding lower

EUR/GBP could be jolted lower by this session’s monetary policy announcements by the European Central Bank even though the ECB will leave all its policy levers where they are. The statement itself will be neutral for the Euro but the risk is that its President Christine Lagarde will continue to be more dovish than the markets at her press conference 45 minutes later.

As I wrote here, the Eurozone central bank will be happy if the Euro barely reacts to the meeting. However, as the chart below shows, EUR/GBP has been trading in a narrow range between 0.84 and 0.85 since October 12 and now looks ripe for another leg lower to levels not seen since February 2020.

EUR/GBP Price Chart, Daily Timeframe (March 19 – October 28, 2021)

Source: IG (You can click on it for a larger image)

Eurozone inflation worries

The ECB is much more likely to signal a move to reducing its monetary stimulus programs at its December meeting, where new staff economic projections will be available. The problem for Lagarde before then is that the ECB is considerably more optimistic about Eurozone inflation than the markets are.

Currently, Eurozone inflation is at 3.4%, well above the ECB’s 2% target and its highest level for 13 years. Yet Lagarde still argues that these high inflation readings will be transitory, pushing back against market expectations that the central bank will begin increasing its deposit rate as soon as late 2022.

If she persuades the markets that she’s right – which seems unlikely – EUR/GBP would fall steeply but more likely is that she simply restates her position and the drop in EUR/GBP is more gentle.

UK Budget ignored

Turning to Wednesday’s UK Budget, there was unsurprisingly nothing to move the markets in the statement by Chancellor of the Exchequer Rishi Sunak; there rarely is. However, there were rises in the share prices of companies like JD Wetherspoon that will benefit from changes in the tax regime for alcoholic drinks, and there was also a steep drop in the yield on the 10-year UK Government bond. Sterling, however, barely reacted and attention among Sterling traders will now turn to next Thursday’s meeting of the Bank of England’s rate-setting monetary policy committee.

— Written by Martin Essex, Analyst

Feel free to contact me on Twitter @MartinSEssex