EUR/GBP recovers back to 0.8500 level as markets digest BoE, ECB policy decisions

• EUR/GBP is back to just below the 0.8500 level from earlier near 0.8450 lows.
• Markets are digesting Thursday’s ECB and BoE rate decisions.

EUR/GBP was under scrutiny to an unusual degree this Thursday given both the BoE and ECB set policy, though one of the rate decisions proved more consequential/of a market mover than the other. EUR/GBP dipped as low as 0.8450 after the BoE surprised markets with a 15bps rate hike, breaking to the south of this month’s prior triple bottom in the 0.8490 area in the process.

But most of Thursday’s losses have been pared in wake of the ECB policy announcement, with EUR/GBP now trading back just under 0.8500 and down only about 0.15% on the day. For reference, the ECB delivered few surprises by confirming the end of the PEPP in March, though reinvestments would continue to the end of 2024, whilst also unsurprisingly announcing a temporary increase in APP purchases in Q2 and Q3 to compensate somewhat for the end of the PEPP. The ECB’s 2022 inflation forecast got a big upgrade which may have spurred some upside in the pair.

With the last major risk event out of the way for the year for both the euro and pound sterling, focus will likely now return to the evolution of the pandemic. The UK appears to be the European Omicron hotspot (for now), with France banning tourist travel as cases there rise sharply. The risk of lockdowns being toughened again ahead of Christmas is high and weakness in the economy is already being seen creeping in via the UK December PMIs. Perhaps Europe will follow suit in a few weeks. For now, bearish UK Omicron developments will likely be a tailwind for EUR/GBP, which already relinquished the bulk of its post-surprise BoE rate hike gains.