EUR/GBP POPS TO FOUR-WEEK HIGHS ABOVE 0.8520 AS STERLING SLIDES POST-BOE

• EUR/GBP is sharply higher in wake of the latest BoE policy announcement, which was a dovish surprise.
• The pair hit its highest since early October above 0.8530 and its 50DMA.

EUR/GBP has risen sharply in the last hour or so in response to a more dovish than expected Bank of England policy announcement and is now trading at its highest levels since the 5^th of October. The pair was trading close to its 21-day moving average at just above 0.8460 prior to the announcement but has since jumped all the way to the 0.8530s, which now puts it above its 50-day moving average at 0.8523.

BOE RECAP

To recap the BoE event quickly; the bank confounded investor expectations for a 15bps rate hike, instead of voting 7-2 to maintain interest rate at 0.1%, and voting 6-3 to maintain the size of its gilt remit at £895B, which means gilt purchases will continue until the end of the year. The bank said it wants to make sure the economy evolves as expected over the coming months, and is particularly keen to observe the labour market after the government’s furlough scheme ended at the end of September, before hiking, though it did say that rate hikes would likely be warranted in “the coming months”, which will keep expectations for a December rate hike alive.

The bank’s new economic forecasts also had a dovish bias, with 2022 GDP growth forecasts getting a sizeable downward revision to 5.0% from 6.0% and inflation, whilst seen peaking at 5.0% in April, seen falling back to the 2.0% target by the end of the three-year forecast horizon. This is in fitting with the BoE’s overarching view that the sharp rise in inflation will ultimately be transitory, though uncertainty about future energy prices makes forecasting more difficult. The dovish forecasts were are being interpreted as pushing back against the money market’s aggressive pre-announcement pricing to hikes over the next two years.

Policy divergence could weigh on GBP

The December 2022 short-sterling futures contract (a proxy for where the BoE bank rate is expected to be next December) rose sharply in response to the BoE meeting and is currently around 98.85, having been as low as 98.65 earlier on Thursday, which means markets are pricing about 20bps less in rate hikes by next December. By contrast, the three-month December 2022 Euribor future (a proxy for where the ECB deposit rate will be next December) has only risen from about 100.30 to 100.35 on Thursday.

That means the implied BoE/ECB December 2022 interest rate differential has dropped by about 15bps on Thursday – if this differential continues to close over the coming weeks as markets pare back on hawkish BoE rate hike bets, this could continue to lift EUR/GBP. A good target for the bulls might be the 200DMA at 0.8587.