EUR/GBP slips as ECB and BoE hold rates, but hawks stay alert now

Sterling edges up as BoE split offsets ECB's hawkish rate signals

The European Central Bank (ECB) kept the Deposit Rate at 2%, even though the Harmonized Index of Consumer Prices (HICP) in April rose from 2.6% to 3%, as Eurostat reported. ECB President Christine Lagarde said the decision to hold rates was unanimous, but there were discussions “at length” to raise rates amid rising energy prices due to Iran’s war.

She hinted that the ECB will assess the economic situation and warned that a stagflationary scenario lurks. Meanwhile, money markets are pricing in nearly three 25 basis points rate hikes by the Lagarde and Co. for the rest of the year.

The Eurozone economy grew modestly in Q1, rising 0.1% QoQ, below estimates for a 0.2% expansion.

In the UK, the Bank of England (BoE) followed suit, keeping rates steady at 3.75% as expected, on an 8-1 vote split, with the Chief Economist, Huw Pill, voting for a rate hike.

BoE Governor Andrew Bailey commented that the central bank faces a “difficult judgment call” on whether to adjust rates proactively or wait for evidence of a sustained rise in inflation. However, he pushed back against the swaps market, which was pricing in two rate hikes.

At the beginning of April, Bailey pushed back against investors who were pricing in further BoE tightening. The BoE’s meeting minutes revealed that some policymakers “might prefer to act early” before inflation becomes persistent.

Up next, the Eurozone docket is absent, while in the UK, traders will eye BoE’s Chief Economist Huw Pill’s speech.

EUR/GBP Price Forecast: Technical outlook

In the daily chart, EUR/GBP trades at 0.8637, extending a bearish bias as spot remains capped beneath the cluster of simple moving averages around 0.8686 and below the descending trend-line break level at 0.8704. The latest 14-day Relative Strength Index at 34.7 hovers just above oversold territory, hinting that while bearish momentum persists, downside pressure may be losing some intensity.

On the topside, initial resistance is located at the triple simple moving average area near 0.8686, with a further barrier at the former trend-line break level around 0.8704, which should act as a notable cap while the pair trades below it. A daily close above these successive hurdles would be needed to ease the current downward pressure and open the way for a more sustained recovery phase.

(The technical analysis of this story was written with the help of an AI tool.)

Euro FAQs

What is the Euro?

The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

What is the ECB and how does it impact the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

How does inflation data impact the value of the Euro?

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

How does economic data influence the value of the Euro?

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.

How does the Trade Balance impact the Euro?

Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.