EUR/GBP slides lower into 0.8330s as FX markets focus on central bank divergence post-hawkish Fed

• EUR/GBP has slipped back to the 0.8330s with bears eyeing a retest of recent multi-year lows under 0.8310.
• FX markets are trading on central bank divergence post-hawkish Fed meeting, hence GBP outperformance versus the euro.

EUR/GBP fell to fresh weekly lows in the 0.8330s on Thursday, with bears eyeing a retest of recent multi-year lows printed last week just under 0.8310 and a push lower towards the late-2019/early-2020 lows in the 0.8280 area. Risk appetite took a knock on Wednesday after a hawkish Fed policy meeting where the bank teed up the prospect of multiple rate hikes in 2022 and Fed Chair Jerome Powell refused to rule out a 50bps move in March. Normally, that might push EUR/GBP higher given sterling’s higher beta to broad risk appetite, but the Fed meeting appears to have encouraged FX markets to trade more on central bank policy divergence.

That might explain why EUR/GBP has continued to push lower. The BoE is expected to remain ahead of the Fed in terms of policy normalisation with a second post-pandemic rate hike in February, while the ECB is still yet to substantially taper its QE buying, let alone hike rates. Better than expected retail sector survey data for January from the Confederation of British Industry on Thursday may also be helping sterling outperform the euro. At the very least, the positive UK data appears to have negated a not as bad as forecast German GfK Consumer Sentiment reading for February.

Looking ahead, the much-anticipated Sue Gray report on alleged parties in Downing Street which at the time broke lockdown rules will be released later this week and could further ramp up pressure on UK PM Boris Johnson to resign. Most analysts continue not to expect any follow-through on the pound. Otherwise, other key events to watch this week include flash German, Spanish and French Q4 2021 GDP growth readings on Friday, which could have a moderate impact on ECB policy expectations.