December 16, 2021 9:45:58

It’s a kind of “Super Thursday” today with both the ECB and the Bank of England meeting in quick succession. This will cause competing forces on both currencies, not least on EUR/GBP. (We note there is no press conference or new forecasts in Threadneedle Street, so it is not in the truest sense a “super” Thursday at the BoE.)

The market expects a dovish message from President Lagarde as policymakers pay more attention (than the Fed) to the impact of Covid and the Omicron variant, with inflation remaining elevated and above target. While new forecasts are set to show a marked upward revision in the near-term, they will also see prices falling back in 2023 and 2024. This means the ECB can be patient, but also end its emergency bond buying programme (PEPP) to placate the hawks.

In the UK, the chances of a 15bp have increased this week after strong job and inflation reports. There’s now roughly a 50% chance from the one-in-three possibility at the start of the week. The bank abstained from lift-off in November, and some want the MPC to take the symbolic step and move the policy rate to 0.25%. But Omicron is threatening the outlook so policymakers could pause again and reiterate that rates need to be raised next year. This would open the door to a Feb hike and help support sterling.

EUR/GBP toying with long-term trendline

The downside risks from the new Covid variant have taken a toll on GBP. From posting new cycle lows at 0.8380 in mid-November, the pair has risen back to the 100-day SMA above 0.85.

The midway point of this year’s high/low sits at 0.8549. This capped further upside, as did perhaps more significantly, trendline resistance from the December high. A BoE Hike would certainly push prices lower, towards the 50-day SMA at 0.8483 with the August low at 0.8450 in sight. More downside in the euro aims for recent cycle lows below 0.84.