- EUR/GBP reversed 100 pips higher from just above late-2019/early-2020 lows in the 0.8280s after hawkish ECB commentary.
- President Lagarde refused to repeat her previous assertion that a rate hike in 2022 is very unlikely.
EUR/GBP has reversed sharply higher from its initial post-BoE session lows in the 0.8280s, where the pair came within a whisker of hitting multi-year lows from back in late-2019/early-2020, and now trades in the 0.8380s. That means the pair, having been as much as 0.5% lower on the day, now trades 0.75% higher. The reversal came after, in her usual post-ECB policy announcement press conference, President Christine Lagarde opted not to repeat her prior assertion that a 2022 rate hike was highly unlikely. The President instead opted to emphasise how the ECB would take a data-dependant approach and said she would make no pledges without conditionalities.
Market participants interpreted these comments from Lagarde as opening the door to a rate hike sometime later in 2022, boosting the euro substantially. Indeed, Bloomberg just report that, according to sources, the ECB is prepared to recalibrate its policy guidance at the March meeting when it releases new economic forecasts, with policymakers reportedly in agreement that it is not sensible to exclude the possibility of a 2022 rate hike. So it seems that the ECB has won the battle of hawkish surprises this Thursday, with EUR/GBP’s post BoE rate decision weakness having proven short-lived.
Recall that sterling was boosted prior to the ECB’s rate decision after the BoE hiked interest rates by 25bps and revealed that four out of nine rate-setters had actually wanted a larger 50bps move. EUR/GBP is now eyeing a test of the 0.8400 level. As the ECB tightening narrative gains more traction and tightening bets build, this could be a catalyst to disrupt EUR/GBP’s steady grind lower in recent months. Yes, the BoE is tightening too, and is a long way ahead of the ECB regarding policy normalisation, but there are serious doubts about the health of the UK economy with the cost of living crisis set to worsen substantially in April.