EUR/GBP has moved sharply higher this week but we now expect a trend reversal to the downside – the reasons why and key technical levels of support and resistance to watch below…
“The Bank of England sent a stark warning that Britain risks a double-whammy of a recession and inflation above 10% as it raised interest rates on Thursday to their highest since 2009, hiking by a quarter of a percentage point to 1%.” (REUTERS)
The pound fell by more than a cent against the U.S. dollar to hit its lowest level since mid-2020, briefly dipping below $1.24, as the BoE’s new forecasts for the world’s fifth-largest economy warn of a recession.
“The outlook for the pound will remain grim just like the GDP forecasts provided by the BoE today.” (Derek Halpenny MUFG.)
The Bank’s new forecast has inflation moving up to 10% and shows CPI below target at the three-year horizon based on market rate hike expectations.
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These expectations indicate that the BoE thinks investors are pricing in too many hikes for 2022.
Before the meeting, investors were expecting a rate rise at every meeting this year and expectations are now being reduced and the GBP has fallen back.
How many more times will the BoE hike?
Policymakers are divided, and three members actually wanted a 50bp hike for May.
These members are concerned about the tight jobs market, faster wage growth, as well as high consumer inflation expectations.
The market is looking for 2 – 3 hikes going forward which is a considerable drop from previous expectations.
The BoE also expressed concern about the ongoing Russia Ukraine crisis and the IMF actually sees the UK economy seeing the slowest growth of all G 7 nations.
While the outlook is gloomy a lot of bad news is priced in for the GBP and speculators have a big short position which we think could get hit on stop.
If it’s bad in the UK it’s worse in the eurozone with the Ukraine Russia crisis having more of an impact on growth.
Going forward we expect the UK economy to do better than the zone and rates are already higher with rates in the UK at 1% while in eurozone rates are negative but could this change?
“We now expect the ECB to hike rates in July and September to bring the era of negative deposit rates to an end. Potentially, there could be a third rate hike in December, though this runs the risk of becoming an ex-post policy mistake.” (ING)
The market is pricing in more than this forecast with rates expected to rise to 1%. We don’t think this will be possible as the poorer nations of the zone cannot take higher lending costs – we think the bad news is in for the GBP and the good news discounted for the EUR so expect the recent EUR rally to fade.
Technical Analysis
We view the EUR as a sell back below support with a stop clear of daily chart highs for a move back to support levels indicated.
