EUR / GBP dips to nearly three-week low in reaction to BoE hawkish, ECB decision then rises

  • EUR / GBP saw aggressive selling after the BoE announced a surprise rate hike.
  • The nervousness of COVID-19, a modest recovery in demand for euros helped to limit further losses.
  • Investors also appeared reluctant to place new bets ahead of the key ECB decision.

The pound has rallied broadly in response to a hawkish move by the Bank of England and dragged the EUR / GBP to an almost three-week low, to the midpoint of 0.8400 in the last time.

After brief consolidation in the middle of the European session, EUR / GBP came under intense selling pressure after the BoE announced a surprise rate hike at the end of the December monetary policy meeting. On top of that, the distribution of 8 to 1 to raise the interest rate by 15 basis points to 0.25% was seen as a more hawkish change.

In the accompanying statement, officials noted that a slight tightening is needed as inflation heads to a peak and is expected to be around 6% in April. This disappointed market participants, anticipating that the UK central bank would hold fire amid Omicron concerns, and caused an aggressive short hedge around the pound sterling.

Meanwhile, bulls in the GBP did not appear to be affected by the BoE downgrading its GDP forecast for the fourth quarter of 2021 amid economic risks from the Omicron outbreak. That said, the worsening COVID-19 situation in the UK could prevent GBP bulls from placing further bets and supporting the EUR / GBP crossover.

Apart from that, a modest rally in the common currency, supported by the massive selloff in the US dollar after the FOMC, could further help limit the decline in the EUR / GBP pair. The market’s attention is now on the decision of the European Central Bank, which will influence the euro and give new trading momentum to the EUR / GBP pair.

Technical levels to watch

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