ECB and BOE Expected to Hold With Diverging Views

The EURGBP has resumed its downward trajectory as investors raise the odds that the ECB will need to become more dovish, while the BOE continues its gradual easing cycle.

The Key Developments

• The ECB is widely expected to hold, but after the euro rose, analysts are increasingly wary that the central bank could signal a dovish turn.
• The BOE is expected to keep rates unchanged, with a narrow vote, as traders anticipate the next cut at the April meeting.
• The pound has gained against the euro lately amid hotter inflation in the UK, while consumer prices in the Eurozone have eased.

ECB On Sidelines, BOE Timing Cut

Economists are unanimous in expecting the ECB to keep rates unchanged on Thursday, as inflation is still within target. However, the odds of a rate cut sometime in the future have been increasing. The EURUSD's appreciation in the wake of US President Donald Trump's tariff war has put downward pressure on inflation, which could prompt the ECB to adopt an easing bias. For months, President Christine Lagarde has repeated that consumer price growth and monetary policy are "in a good place". If that were to happen again, markets could continue to see the euro strengthen amid global geopolitical uncertainty and expectations that the share economy will accelerate in the first quarter. On the other hand, if Lagarde were to express concerns about the euro becoming too strong or inflation drifting too low, her remarks could be the dovish signal a minority of economists are looking for. Since only about a fifth of economists expect a rate cut by the summer, a key shift in rhetoric from ECB officials could weigh on the euro.

The situation for the BOE is much less certain, with futures pricing in a hold while investors look for the timing of the next cut. With inflation still above target, the Bank of England isn't in a hurry to cut rates, even though its own forecasts project consumer price growth slowing through the rest of the year. Markets are expecting a likely cut at the April meeting, so the focus will be on the vote split and the points Governor Andrew Bailey highlights in his press conference. The consensus is that the vote will be close, 5-4, with the dissenters voting for a cut and Bailey as the swing vote. An emphasis on the labour market would likely lead markets to expect an earlier rate cut and could weigh on the pound. On the other hand, if the vote to hold is more solid, or there is greater concern about the recent uptick in inflation, then sterling could be supported as markets delay the rate-cut forecast. This could help GBPUSD regain its multi-year highs recorded just a few days ago.

The EURGBP is Sliding on Inflation

Markets see the BOE as slightly more dovish than the ECB, with one rate cut in Britain priced in this year, compared with none on the continent. However, recent inflation trends show consumer prices easing in the Eurozone, while in the UK, prices have been hotter than expected. This has allowed the pound to gain a little against the euro, causing the EURGBP to slide a bit in the latter part of January. Traders will be assessing the shifting odds of rate cuts following the BOE and ECB meetings on Thursday to better gauge the pair's direction. The recent weakness in the dollar has made the ECB concerned about the strength of the euro, adding disinflationary pressure, which isn't as much of a problem for the BOE, with inflation still above target.

EURGBP Bounce Could Form H&S Shoulder

The drop from 0.8745 in EURGBP has brought the 0.8600 handle into focus, pending a breakdown or a bounce. A breakdown may find support near 0.8575 if RSI continues deep into oversold territory, while a bounce, supported by RSI divergence, would initially aim for 0.8650, followed by 0.8700. If bulls sustain the move, a similar shoulder as the right variation could form near 0.8760, triggering a potential reversal. However, further ascent could pave the way for 0.8800 and the peak at 0.8870.

Source: SpreadEx | EURGBP