EUR/GBP Steady at 0.8436 ahead of the BOE Interest Rate Decision 

• French Consumer Spending declined to-0.2% against the forecasted 0.5%. 
• EUR/GBP is trading with a neutral base as investors are waiting for the Bank of England’s interest rate decision.
• Breakout of a double top pattern at 0.8437 will determine the further trend in the EUR/GBP pair.

On Monday, the EUR/GBP pair is trading with a neutral base as investors are waiting for the BOE interest rate decision due on Thursday this week. The day before, the EUR/GBP was closed at 0.8442 after posting a high of 0.8474 and a low of 0.8432. 

The currency pair EUR/GBP dropped on Friday and lost all of its previous session gains as the British pound was more robust against European currencies for the day. 

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The Bank of England stance on monetary normalization plan.

Last week, the pound regained its firm tone as market expectations grew that the Bank of England would accelerate its monetary normalization plan to combat inflation. Many analysts, including finance minister Rishi Sunak, have forecasted a post-pandemic solid recovery in the UK, keeping sterling higher on board.

The European Central Bank maintained its dovish stance in the face of rising inflationary pressures and delayed any interest rate hike until at least late 2023, weighing on the Euro and keeping the EUR/GBP currency pair under pressure for the day.

The expectations that the eurozone’s high inflationary pressures were temporary have been disputed by Eurozone CPI data released on Friday, which showed that consumer inflation rose to 4.1%, more than twice the Bank’s target for price stability. This also kept the shared currency Euro under pressure and increased the decline in EUR/GBP on the last trading day of the week and the month.

A quick economic review

• On the data front, from the European side, at 10:30 GMT, the French Consumer Spending declined to-0.2% against the forecasted 0.5%. It weighed on the Euro, which ultimately added pressure on the EUR/GBP. 
• The French Flash GDP for the quarter surged to 3.0% against the forecasted 2.2% and supported the Euro.
• At 11:45 GMT, the French Prelim CPI advanced to 0.4% against the expected 0.3% and kept the Euro, which capped a further loss in EUR/GBP. 
• At 12:00 GMT, the Spanish Flash GDP for the quarter declined to 2.0% from the projected 2.9% and weighed on the Euro. 
• The German prelim GDP for the quarter also declined to 1.8% from the estimated 2.2% and weighed on the Euro. That dragged EUR/GBP further to the downside. 
• The Italian Prelim GDP increased to 2.6% against the forecasted 2.0% and supported the Euro. 
• At 1400 GMT, the CPI Flash Estimate rose to 4.1% against the predicted 3.7% and increased the Euro. 
• The Core CPI Flash Estimate for the year also surged to 2.1% against the forecasted 1.9% supported by the Euro. 
• The Italian Prelim CPI rose to 0.6% against the anticipated 0.4% and supported the Euro. Thus, it restrained the decline in EUR/GBP. 
• The Prelim Flash GDP for the quarter increased to 2.2%, against the predicted 2.1%, and was supported by the Euro.

The outlook for UK fundamentals

• From the British side, at 13:30 GMT, the M4 Money Supply remained flat with the anticipated 0.6%. 
• The Mortgage Approvals also came in line with the expectations of 73K. The net lending to individuals increased to 9.8 billion, exceeding the forecasted 6.3 billion, bolstering the British pound and adding to the EUR/GBP pair’s losses.

What to expect from the BOE interest rate decision?

The Bank of England meets on the same day as the Norwegian Central Bank. While a Norwegian rate hike is as certain as it gets, the Bank of England’s decision is more complicated. 

To begin with, numerous BOE officials, such as the leadership, have been especially hawkish in their rhetoric. However, they still appear to believe that price pressures are primarily due to re-opening and supply shocks. 

Second, the BOE is still embroiled in QE, and while Governor Bailey has stated that the MPC is willing to raise rates before QE is completed.

Despite these factors, the market has reacted to the verbal signals and its perspective of the BOE’s reaction function. The swap market appears to be pricing in a 45 basis point tightening in the next three months and an 80 basis point tightening in the next six months.

Softer data push the yield to nearly 62 basis points

Consider that when the Bank of England met in September, the implied yield on the December 2021 short-sterling (three-month interest rate contract) was around 13 basis points. It rose to nearly 62 basis points on October 18 before falling back. This is possibly due to softer data (CPI, CBI orders and optimism, and retail sales) and finished last week at 47 basis points. The risk appears to be that the BOE has decorated itself into a corner. 

If the BOE does not act after the hawkish commentary and Bailey’s talk about what the BOE must do, sterling appears vulnerable to weakness due to disappointment.

A dovish-than-expected meeting could even be beneficial to the currency. It would alleviate concerns about tighter policy impeding growth. In any case, investors will be paying close attention to the Bank of England’s updated economic forecasts, which should expose how closely the Bank’s projected rate hike path aligns with the markets’.

EUR/GBP bullish bias dominates over 0.8434 ahead of BOE interest rate

On the technical front, the EUR/GBP currency pair is trading with a solid bullish bias above the 0.843 support level. On the 4-hour timeframe, the EUR/GBP has formed an upward channel. It’s supporting the bullish trend in EUR/USD, providing immediate support at the 0.843 level. At the same time, the resistance remains at the 0.8473 level.

On the bullish side, a breakout of the 0.8437 level exposes the EUR/GBP price towards the 0.8496 level. Moreover, an additional breakout of the 0.8496 resistance level could lead the EUR/GBP price towards the 0.8525 level.

On the bearish side, the breakout of the 0.8435 support level exposes the pair towards the 0.8450 level. However, the 20 and 50-day exponential moving averages can provide a hard time for sellers. 

Lastly, the MACD and RSI indicators support a bullish bias in the EUR/GBP pair. Therefore, the breakout of a double top pattern at 0.8437 will determine the further trend in the EUR/GBP pair. Stay tuned for more updates!