EUR/GBP hits 23-month lows, eyes test of 0.8300 level as markets ignore UK politics, focus on BoE rate hikes

• EUR/GBP recently pushed to fresh 23-month lows underneath the 0.8310 level on Thursday.
• The release of the latest ECB minutes did not impact FX market sentiment.
• Markets are focused on another likely rate hikes from the BoE next month.

EUR/GBP recently pushed to fresh 23-month lows underneath the 0.8310 level on Thursday and is now down about 0.3% on the session and eyeing a test of 0.8300. The release of the latest ECB minutes did not impact FX market sentiment as it did not contain any surprises/new revelations. EUR/GBP’s latest push lower marks a near 70 pip reversal from Wednesday’s highs near 0.8380, with traders seemingly having taken the opportunity provided by the rally to add to short positions as the pair retested its November 2021 lows (at 0.8380).

Traders might reason that with the recent run of data strongly supportive of expectations for the BoE to hike interest rates again in February, BoE/ECB policy divergence is set to remain a key driver of EUR/GBP downside. Recall that labour market data on Tuesday saw the UK unemployment rate drop back to pre-pandemic levels and that Consumer Price Inflation data on Wednesday hit its highest in 30 years.

Some analysts are calling for the pair to retest late-2019/early-2020 lows in the 0.8270/80s soon, despite uncertainty about whether Boris Johnson will stay in his role as UK PM. Indeed, analysts at Berenberg said a change in PM could actually end up as a positive for UK markets, given that the Conservative party would likely choose a replacement based on who has the best chance of beating Labour leader Keir Starmer at the next general election.

The bank argues that a new PM would likely pursue “similar policies to Johnson in a much calmer and more deliberate fashion”. ING says that “unsurprisingly, political risk has not damaged GBP”, and adds that “the focus remains squarely on whether the BoE hikes 25bp on February 3”. The bank continues to favour EUR/GBP retesting the aforementioned 2019/2020 sub-0.8300 lows soon.