EUR/GBP surges to fresh YTD peak, around mid-0.8500s amid BoE-inspired slump in sterling

• EUR/GBP caught aggressive bids and surged to a fresh YTD top after the BoE policy decision.
• A split MPC and gloomy economic outlook pointed to a dovish tilt, which weighed on sterling.
• Resurgent USD demand and the Ukraine crisis hold back the euro bulls from placing fresh bets.
• The technical set-up supports prospects for additional gains and a move towards the 0.8600 mark.

The post-BoE selling around sterling pushed the EUR/GBP cross to a fresh YTD high, around mid-0.8500s during the mid-European session.

The UK central bank on Thursday lifted its key interest rate for the fourth time since December, to the highest level in 13-years to curb inflation, which has leapt to a 30-year high. In the accompanying policy statement, the Bank of England noted that some degree of further tightening in monetary may still be appropriate in the coming months.

That said, a split emerged in the Monetary Policy Committee as two members said that the guidance was too strong considering the risks to growth. Moreover, the BoE warned about a sharp slowdown and is now forecasting the UK economy to contract by 0.25% in 2023. This was seen as a dovish shift, which, in turn, weighed heavily on the British pound.

In the post-meeting press conference, BoE Governor Andrew Bailey said that the MPC doesn't agree with people who think that they should raise interest rates a lot more. This, in turn, suggested that the rate hike cycle could be nearing a pause and prompted aggressive short-covering around the EUR/GBP cross, taking along some intermediate trading stops.

The momentum pushed spot prices beyond a downward-sloping trend-line resistance extending from April 2021 and might have already set the stage for further gains. That said, resurgent US dollar demand, along with concerns that the European economy will suffer the most from the Ukraine crisis, weighed on the euro and might cap gains for the EUR/GBP cross.

Nevertheless, the bias seems tilted firmly in favour of bullish traders and any meaningful slide back towards the 0.8500 psychological mark could be seen as a buying opportunity. Some follow-through buying beyond the mid-0.8500s would reaffirm the positive outlook and allow the EUR/GBP cross to reclaim the 0.8600 mark for the first time since October 2021.

Technical levels to watch