The recent sell-off in EUR/GBP may be coming to an end as ECB governing council members continue to opine that the central bank will shortly start hiking interest rates in an attempt to stave off rising inflation. The ECB’s deposit rate of -0.5% is set to return to positive territory this year with the outline of a series of 25 basis point rate hikes expected to be tabled at the June 9 meeting and started at the July 21 meeting. Current market pricing is for around 90 basis points of tightening this year, implying that four 25 basis point rate hikes may be on the cards this year. The ECB, along with a range of other major central banks, is battling with an unwelcome double of sky-high inflation – 7.5% in April according to a flash estimate from Eurostat – and faltering growth. The European Commission recently downgraded European growth to 2.7% in 2022 from a prior expectation of 4%.
The Bank of England (BoE) is also expected to continue hiking rates. The UK central bank has already raised the Bank Rate by a total of 90 basis points to 1%, the highest level in 13 years, to try and dampen runaway price pressures. While the market expects a further 115 basis points of rate increases this year, UK growth is expected to slow sharply in 2023, leaving the BoE battling rampant inflation and weakening growth. The projected 1%+ of rate hikes over the rest of 2022 may not play out if growth continues to erode.
Looking at the shorter term, EUR/GBP has turned sharply lower since the May 12 multi-month high of 0.8621. The pair currently trades just above 0.8400 and near a cluster of prior support between 0.8384 and 0.8365. The daily chart remains positive with a series of higher highs and higher lows from early March still in place
If EUR/GBP can keep support at 0.83665 in the short-term, then the pair may well push back and eventually look to post a new higher high on a longer term outlook.