EUR/GBP trading near 0.8300 as analysts mull whether BoE can live up to tightening expectations

• EUR/GBP is trading just under 0.8300, after pulling back from earlier highs near the 21 and 50DMAs at 0.8350.
• ING and MUFG warn against betting on further downside with the BoE likely to underwhelm tightening expectations this year.

EUR/GBP is trading flat just beneath the 0.8300 level, having erased earlier gains that saw it rally as high as the 0.8330s and eye a test of the 21 and 50-Day Moving Averages in the 0.8350 area. The themes of BoE/ECB policy divergence are being monitored by traders ahead of remarks from the respective central bank heads Christine Lagarde and Andrew Bailey at the IMF meetings on Thursday, after some hawkish chatter from ECB’s Martin Kazaks on Wednesday, who talked about a rate hike as soon as July.

In a note to clients on Tuesday, ING points out that money markets are only pricing in 30 bps worth of BoE tightening at its upcoming meeting. “The fact that expectations have not shifted towards the 50bp area despite higher inflation is probably down to the same concerns expressed by the IMF yesterday when it cut the 2023 UK growth outlook to 1.2% from 2.3%,” the bank notes.

ING continues to argue that market expectations for BoE tightening this year are excessive. “Money markets continue to price in 150bp of BoE rate hikes by year-end, while our economics team thinks that it will be closer to 50bp,” the bank explains. “Any dips in EUR/GBP to the 0.8250 area could be the low point of the year” they warn.

MUFG agree. “We are not convinced the BoE will be in a position to deliver what is priced into the market with growth likely to be very weak through the remainder of this year,” they remark. “We assume two further 25bp rate hikes by the BoE and then a pause… It’s one reason why we see limited downside for EUR/GBP from current levels just below 0.8300.”