EUR/GBP bulls meet the bears ahead of key events

EUR/GBP is up some 1% on the day but is running into offers at the high of 0.8840.  The British Pound came under pressure ahead of the Federal Reserve and Bank of England (BoE) which are both due to meet this week. 

Interest rate expectations have shifted dramatically during a tumultuous few weeks in financial markets owing to the risks of contagion in the banking sector. First of all, the Federal will announce its next rate decision on Wednesday, while the Bank of England will convene on Thursday.

As of Tuesday morning, markets were pricing in a 44% chance of no change from the Bank of England, and a 56% chance of a 25 basis-point increase. We will have the United Kingdoms' inflation data on Wednesday also and traders will be looking to this for prospects of some easing. 

Analysts at TD Securities say that headline inflation likely fell 0.2ppts in March, in line with the MPC's forecast, on the back of another decline in petrol prices. ´´A shortage of certain vegetables and fruits adds some upside risk to the print. We also expect a rebound in hotel prices and continued strong core goods momentum to keep core inflation elevated.´´

Meanwhile, the Federal Reserve is expected to hike but maybe just 25bp, taking the Fed Funds rate to 4.75%-5.00%. There will also be the dot plot and the post-meeting communication is likely to emphasize that the Fed is not done yet in terms of tightening.

Analysts at TD Securities argued that the officials will likely be flagging the more uncertain economic environment.
´´Treasuries will react to the Fed's messaging around future hikes and the dot plot. Any hint that the Fed will stop hikes due to stability worries could create an outsized market reaction,´´ the analysts said. ´´Messaging and dot-plot will be critical. Our base case is hawkish which poses a risk that STIR vol persists, (The short-term interest rate (STIR) analytics)´´