EUR/GBP rebounds modestly after hitting fresh 23-month lows near 0.8300 as BoE/ECB rate decisions eyed

• EUR/GBP squeezed out a fresh 23 month low under 0.8305 but has since rebounded to around 0.8330.
• A barrage of Eurozone GDP and inflation data has done little ot shift the dial for EUR/GBP thus far.
• The pair is likely to trade in rangebound fashion ahead of Thursday’s BoE and ECB rate decisions.

A barrage of Eurozone GDP and inflation data has done little ot shift the dial for EUR/GBP thus far on the session, with the pair just about squeezing out a fresh 23-month low earlier in the session just under 0.8305. The pair has since rebounded to trade around the 0.8330 mark, up a modest 0.1% on the day, as euro traders mull what the latest Eurozone data will mean for the ECB and sterling traders await a statement from the PM on the Sue Gray report. Regarding the latter, “partygate” as it has been coined (referring to multiple accusations of lockdown breaches in Downing Street over the past years), while fuelling rampant speculation that UK PM Boris Johnson might be ousted, has not impacted sterling yet.

The latest batch of Eurozone data, meanwhile, confirmed a robust 2021 GDP growth rate of 4.6% (a tad under the expected 4.7%). According to flash estimates, the headline YoY HICP inflation rates in both Spain and Germany fell in January (though not quite as much as expected). Investors do not seem to have interpreted the data as changing much from the perspective of the ECB. The central bank is issuing its latest monetary policy announcement on Thursday, an event ahead of which euro traders are likely to keep their powder dry/refrain from placing any big bets.

The same can be said for sterling traders ahead of the upcoming BoE rate decision, also on Thursday. That suggests trading conditions for the pair is likely to be rangebound in the coming days. The ECB announcement is not expected to yield any policy/policy guidance changes, thus will likely not be too much of a market mover. The same cannot be said for the BoE, who are expected to implement a 25bps rate hike (to 0.5%) and kick off quantitative tightening by ending balance sheet reinvestments.

Sterling will likely be most sensitive to guidance on the future of the rate path, with money markets currently pricing a terminal BoE rate of around 1.25%. The consensus amongst analysts is that as the BoE brings expected monetary tightening into reality, thus widening the BoE/ECB policy divergence, this will likely keep EUR/GBP under pressure. Medium-term bears continue to target a test of the late-2019/early-2020 lows in the 0.8280 area.