EUR/GBP dives to near three-week low in reaction to hawkish BoE, ECB decision up next

• EUR/GBP witnessed aggressive selling after the BoE delivered a surprise rate hike.
• COVID-19 jitters, a modest pickup in the euro demand helped limit further losses.
• Investors also seemed reluctant to place fresh bets ahead of the key ECB decision.

The sterling rallied across the board in reaction to a hawkish Bank of England decision and dragged the EUR/GBP cross to a near three-week low, around mid-0.8400s in the last hour.

Following a brief consolidation through the mid-European session, the EUR/GBP cross came under intense selling pressure after the BoE delivered a surprise rate hike at the end of the December policy meeting. Adding to this, the 8-1 vote distribution to raise the interest rate by 15 bps to 0.25% was seen as a more hawkish shift.

In the accompanying statement, officials noted that a modest tightening is needed as inflation heads toward a peak and is likely to be around 6% in April. This disappointed market participants, anticipating that the UK central bank will hold fire due to Omicron concerns, and prompted aggressive short-covering around the British pound.

Meanwhile, the GBP bulls seemed unaffected by the fact that the BoE revised down its GDP forecast for Q4 2021 amid the economic risks stemming from the Omicron outbreak. That said, the worsening COVID-19 situation in the UK might hold back the GBP bulls from placing fresh bets and lend some support to the EUR/GBP cross.

Apart from this, a modest pickup in the shared currency, supported by the post-FOMC US dollar selloff, could further help limit the downside for the EUR/GBP cross. The market focus now shifts to the European Central Bank decision, which will influence the euro and provide a fresh trading impetus to the EUR/GBP cross.

Technical levels to watch