EUR/GBP continues to climb post-dovish BoE, bulls target 200DMA at 0.8587

• EUR/GBP continues to climb and is now above 0.8550, with bulls likely targetting a test of the 200DMA at 0.8587.
• After disastrous miscommunication by the BoE in the run-up to Thursday’s policy announcement, the BoE faces credibility questions.

EUR/GBP continues to steadily climb in wake of Thursday’s dovish BoE surprise that has sent GBP tumbling versus all of its major G10 counterparts, the euro included. The pair, having cleared a number of key levels of resistance at the psychological 0.8500 level, the prior weekly high at 0.8510 and the 50-day moving average at 0.8523, is now consolidating slightly to the north of the 0.8550 level. While the euro might not be the best G10 currency to express a bearish GBP view against, given that the ECB is still expected to lag well behind the BoE in terms of monetary policy tightening even if the BoE is now going to be more dovish than market participants had been expecting as recently as this morning, it still seems likely that the latest bounce in the pair will have legs. The next target for the bulls will be the 200DMA at 0.8587.

BoE faces credibility questions

Thursday was not a good day for the credibility of the Bank of England’s policymaking, something which the severe sterling sell-off and a sharp drop in UK gilt yields can attest to. Hawkish commentary from BoE Monetary Policy Committee (MPC) members in the run-up to the latest monetary policy meeting had convinced money markets and a good proportion of analysts/economists that a 15bps rate hike was on its way and that the bank would be signaling that further rapid tightening though to 2023 would also be likely. In the end, only two of the nine MPC members voted for a 15bps hike and only three voted for an early end to the bank’s current £895B bond-buying scheme (i.e. to cap it at £875B).

The BoE said that it wanted to wait to see more labour market data given the UK government’s furlough scheme just ended at the end of September (the unemployment rate is likely to rise modestly) and, rather than guaranteeing rate hikes as many thought the BoE would at minimum do if it opted not to hike rates, the bank merely said that rate increases would be appropriate in the coming months IF the economy progresses as expected. Meanwhile, in the post-meeting press conference, inflation was categorised as “transitory” and seen coming back close to the bank’s 2.0% target by the end of the forecast horizon.

Needless to say, markets were completely wrong-footed, and governor Bailey & co. now face intense scrutiny regarding the bank’s credibility in light of this failure to properly guide investor expectations. The governor retorted to a critical press that it was not the BoE’s job to guide market rates, which is not something you would see Fed Chair Jerome Powell saying; the Fed Chair, who just masterfully pulled of a QE taper without creating any notable market drama, understands the importance of guiding market expectations properly overtime to the transmission of monetary policy to the economy. In private, BoE members will know they messed up. But volatility surrounding BoE policy in UK markets is likely to be elevated in the months ahead as markets question whether they can trust anything BoE members are telling them.