EUR/GBP exchange rate outlook ahead of ECB, BoE decisions

By:
on Feb 1, 2023
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  • The EUR/GBP price has made a strong comeback in the past few days.
  • Focus shifts to the upcoming ECB and BoE decisions.
  • Expectations are that the two will maintain their hawkish tone.

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The EUR/GBP exchange rate had a strong performance in January as hopes of a BoE and ECB pivot. It jumped to a high of 0.8894, the highest point since September 9, 2022. Data compiled by TradingView shows that the EUR to GBP spot rate has risen by over 7.7% from its lowest point in 2022.

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ECB and BoE decision

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The EUR/GBP price will be in the spotlight as investors react to the latest European inflation data. According to Eurostat, inflation dropped for the third straight month in January. The headline consumer inflation fell to 8.5% from the previous 9.1%. 

Inflation fell primarily because of the falling natural gas prices. Data by Reuters shows that gas prices plunged to the lowest level in more than two years, helped by low industrial demand and warmer-than-expected weather. Still, there are concerns that gas prices could start rising as European countries start filling their reserves.

European inflation data came ahead of the latest interest rate decision by the European Central Bank (ECB) scheduled for Thursday. With the headline CPI still much higher than the ECB target of 2.0%, economists expect that the bank will continue with its hawkish tone. It will likely hike by either 0.25% or 0.50%.

The other catalyst for the EUR to GBP spot exchange rate is the upcoming BoE decision. Unlike the ECB, the BoE is battling a bigger challenge. UK’s inflation is still above 10% while the economy is expected to be in a deep contraction. In a report published on Tuesday, the IMF warned that the economy will underperform that of the heavily-sanctioned Russia, as we wrote here.

Therefore, the BoE is in a difficult place since higher rate hikes could drag the economic recovery. On the other hand, a more dovish tone will likely lead to higher inflation in the near term.

EUR/GBP forecast

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EUR/GBP

EUR/GBP chart by TradingView

The 4H chart shows that the EUR to GBP price has been in a bullish trend in the past few days. It managed to move above the important resistance point at 0.8828, the highest point on November 9. The pair has moved above the ascending red trendline and the 25-day and 50-day moving averages. Similarly, the Relative Strength Index (RSI) has moved slightly below the overbought level.

Therefore, the pair will likely continue rising as buyers target the important resistance level at 0.8900. A drop below the support at 0.8820 will invalidate the bullish view.

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