EURGBP could reverse after a sell-off following the European Central Bank meeting.
EURGBP: Weekly Chart
The price of EURGBP has reversed last week’s gains and trades at key support levels. A break below 0.85 has room to move lower to 0.83.
The European Central Bank raised its benchmark rate to 3.75 percent as expected, the highest since 2001. President Christine Lagarde said that she was willing to go further to get inflation down from 5.5 percent.
Lagarde said, “We want to break the back of inflation. 2PC is the goal, and we will get there, come what may.”
Inflation has come down 50% from October’s peak of 11.5 percent but has been “too high for too long”, she added, raising expectations that there is more to come.
She said: “I’m sure people, when they do their shopping, when they fill up the tank, when they pay their gas bill, see the increase is not quite the same as six or seven months ago. Are we satisfied? Are we claiming victory? No. We want to go to the end of the game.”
Carsten Brzeski, economist at ING, said: “The mention of inflation coming down but staying above target ‘for an extended period’ does not sound as if the ECB is yet willing to stop hiking rates”.
“The ECB’s own growth and inflation projections in September will have to see a significant downward revision in order to stop the central bank from hiking rates at least once more after today.”
The ECB’s latest move came after the US Federal Reserve also hiked 25 basis points, while the Bank of England has little choice with its own stubborn inflation. Inflation in the UK was 7.9% last month and is higher than that in other developed economies.
Financial markets expect the BoE’s Andrew Bailey to raise rates from 5% to 5.25% next week, with rates expected to peak at 5.75% by the end of the year.
Andrew Goodwin at Oxford Economics said: “Significant momentum in pay growth and a still-tight jobs market mean the MPC is likely to continue what has been a long succession of rate hikes.
“Since core and service inflation are still unusually high, it will feed the committee’s concerns around ‘second-round’ effects.”
The expectation of more BoE hikes and less ECB means traders are not convinced about the ECB’s intentions. Tomorrow is another big day for the EURGBP, with a flash GDP number from the German economy. The country has been in recession, and a -0.3% print is expected after -0.5% last month. A weaker reading would really hurt the euro and favour the pound.
