European Open: EUR/GBP probes YTD high ahead of BOE and ECB meetings

Matt Simpson February 2, 2023 5:04 AM

With the Fed having delivered their 25bp yesterday, it is now over to the BOE ECB today, who are expected to hike by 100bp between them.

Charts (4)

UK and Europe:

  • UK's FTSE 100 futures are currently up 37 points (0.48%), the cash market is currently estimated to open at 7,798.11
  • Euro STOXX 50 futures are currently up 32 points (0.77%), the cash market is currently estimated to open at 4,203.44
  • Germany's DAX futures are currently up 118 points (0.78%), the cash market is currently estimated to open at 15,298.74

 

US Futures:

  • DJI futures are currently down -37 points (-0.11%)
  • S&P 500 futures are currently up 128.75 points (1.04%)
  • Nasdaq 100 futures are currently up 15.5 points (0.38%)

 

20230202daxboardFX

Today’s main events are clearly the BOE and ECB meeting, where both central banks are expected to hike by 50bps. Whilst the BOE hinted at a 25bp in December, subsequent data likely justifies the full 50 to take rates from 4% to 4.5%. However, there is also a decent chance the BOE may signal a pause in rates, given Governor Bailey tipped his hat to market pricing being ‘about right’ with a terminal rate of 4.5% to 4.75%. So even if there’s no pause today, we’re close to the terminal rate. And that could be the difference to whether GBP closes higher or lower today.

 

  • A 50bp hike with a pause could send GBP lower, whilst no hint of a pause could keep it supported
  • The FTSE 100 still looks appealing to bullish eyes (please see yesterday’s report), and the analysis remains unchanged
  • View yesterday’s livestream which includes notes on today’s BOE and ECB meetings (from 6mins onwards)
  • The ECB are also expected to hike by 50bp today and ion March
  • It is unlikely they will lower their inflation forecasts, but that could be perceived as a dovish hike if they do (and weigh on EUR pairs)
  • But as data remains mixed across the Euro area, I suspect they’re more likely to keep forecasts relatively unchanged and put fire on any talks of a rate cut

 

EUR/GBP daily chart:

20230202eurgbpFX

EUR/GBP has continued higher overnight and probed the January high, presumably in anticipation that the ECB’s meeting will be more hawkish than BOE’s. With two central banks whilst prices test a key level, it marks a clear line in the sane for traders to decide which bank wins the ‘most hawkish’ award, with a more directional movement likely linked to the divergent theme between the two meetings.

 

For example:

  • 25bp BOE hike and pause, with 50bp ECB hike and no hint of pause / cut would likely be the most bullish scenario for EUR/GBP
  • Taking the same situation but with a 50bo may still send EUR/GBP higher, but to a lesser degree
  • If ECB were to downgrade CPI forecasts with a 50bp hike with a 50bp BOE hike, it could send EUR/GBP lower form resistance
  • If ECB were to hike by 50bp, hint at a slower pace in March (less likely) and downgrade inflation forecast, we might see a volatile move to the downside on EUR/GBP

 

Economic events up next (Times in GMT)

20230202calendar2

 

 

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