EUR/GBP price forecast ahead of today’s ECB decision
- EUR/GBP is well bid ahead of today's ECB decision
- An inverse head and shoulders pattern points to 0.92 in the period ahead
- The ECB can surprise markets today by delivering a hawkish statement and giving the common currency a helpin
Bearish sentiment on the euro and Europe was this year’s central theme in the FX market. Understandably so, given the war in Ukraine and rising energy prices.
As such, the euro dropped against the US dollar and fell to levels not seen in decades.
However, surprisingly, the common currency strengthened against some of its peers. For instance, the EUR/GBP exchange rate is higher today than at the start of the year.
So is this strength here to stay?
Moreover, given the European Central Bank (ECB) ‘s decision today, what is the EUR/GBP price forecast for the period ahead?
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The ECB is in a tough spot. On the one hand, higher energy prices have led to higher inflation and rising inflation expectations. But on the other hand, the war in Ukraine and the sanctions imposed on Russia have hurt the eurozone economies. Hence, the ECB is forced to tighten the monetary policy in a low-growth environment.
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Nevertheless, as I argued here, the ECB is in a position to surprise markets at today’s meeting and tighten financial conditions faster than the market expects.
The ECB has room to surprise markets todayCopy link to section
Most analysts expect the ECB to raise the key interest rates by 50bp and announce it today. This is the best case scenario seen by ING, for example, together with the ECB to keep a data-dependent approach.
By tightening faster, the ECB is frontloading rates and delivers much-needed help to the common currency, helping lift some of the bearish sentiment lying around.
EUR/GBP head and shoulders pattern points to more strengthCopy link to section
The EUR/GBP exchange rate was reluctant to drop this year. Instead, it bounced every time, and now it threatens to move above the neckline of an inverse head and shoulders pattern.
Its measured move points to 0.92, and a hawkish ECB might just be the trigger for the market to reach such a level.
75bp rate hike with no guidanceCopy link to section
So what would be a hawkish ECB decision today? Naturally, by announcing a 75bp rate hike instead of 50bp, the ECB would surprise markets and give the common currency a hand.
Also, the ECB’s view on inflation and its balance sheet reduction might be interpreted hawkishlyly as well.
Summing up, the EUR/GBP looks bullish here, with 0.92 in focus, should the ECB deliver a hawkish statement. On the flip side, a drop below 0.8200 would invalidate the bullish technical setup.