EUR/GBP drops back from 0.8500, eyes test of 21DMA

• EUR/GBP has slipped back underneath the 0.8500 level and is eyeing a test of its 21DMA at 0.8465.
• The main driver of the pair this week is set to be Thursday’s key Bank of England meeting.

EUR/GBP has slipped back underneath the 0.8500 level on Wednesday after flirting with the key area of resistance over the past few days. The catalyst for the move lower from above 0.8500, where the pair was trading as recently as the Wednesday European open, to current levels under 0.8480, isn't clear; IHS Markit’s final UK Services PMI survey for October was released this morning and saw upwards revision versus the flash estimate released last month and some have suggested this is helping sterling this morning. Commentary from ECB members this morning has also been quite dovish, with members pushing back against the idea of rate hikes in 2022, which contrasts strongly with expectations for rate hikes from the Bank of England as soon as Thursday this week.

Whatever the reason for the move lower, EUR/GBP is now testing support in the form of the 28 October high at 0.8475 ahead of a potential test of its 21-day moving average at 0.8465. The main driver of the pair for the rest of the week will of course be Thursday’s aforementioned BoE meeting – with markets unsure as to whether the bank will hike rates or not and as to what the voting split on rate hikes will be, the higher than usual degree of uncertainty about this meeting means the FX market reaction could be choppy and go both ways.

ECB pushes back against hawkish market pricing

A number of ECB policymakers have spoken publically thus far on Wednesday. The most important comments came from ECB President Christine Lagarde; after she was criticised last week for not pushing back as strongly against money market pricing for rate hikes in 2022 as markets had expected her to, resulting in volatile conditions in FX and bond markets in the days since Lagarde was a little more explicit on Wednesday. The conditions that the ECB wants to see before it starts hiking interest rates (i.e. that inflation is above the 2.0% target and that is it expected to remain there for the duration of the bank’s forecast horizon) are unlikely to have been met next year, she said, saying that the Eurozone economy would continue to require support even after the pandemic has faded. Moreover, Lagarde added that the medium-term inflation outlook remains subdued.

Three-month Euribor futures for December 2022, which slumped as low as 100.155 last Friday (implying that markets were pricing as much as 50bps of ECB rate hikes by the end of 2022), are now back to trading around 100.30, which implies a more modest 30bps of hikes by the end of next year. If ECB policymakers are right, this could rally all the way back to the 100.50 area (which would imply no hikes). This would likely weigh on the euro, though for now FX markets are focused on the upcoming Fed meeting.

Brexit, fish wars

Brexit remains in the headlines; UK PM Boris Johnson was recently on the wires talking about how the UK wants “substantive” changes to the existing Northern Ireland Protocol. Political analysts expect the UK to soon trigger Article 16, which allows the UK to take unilateral action on the agreement if it deems the application of the protocol is resulting in serious negative consequences. EU leaders are warning the UK against taking such a step, as it opens up the prospect of further fraught negotiations on trade and legal matters that may escalate, as the ongoing UK/France fishing row also threatens to. The tone of the news on this latter dispute has improved in recent days however after the French opted not to impose retaliatory measures on the UK overfishing access and French government ministers recently praised the UK government’s constructive approach to discussions on fishing.