EUR/GBP: Confusing picture on BoE communication – ING

ING’s Chris Turner describes Sterling price action as confusing after the Bank of England’s latest communication. While he sees the BoE laying groundwork for a June hike, some investors interpreted the message as dovish, possibly due to oil-driven declines in GBP rates. He warns that key EUR/GBP support at 0.8600/0.8610 looks vulnerable in thin holiday trading.

BoE signals clash with market reaction

"Sterling presents a confusing picture at the moment. Some read yesterday's Bank of England communication as dovish, even though our take is that it is laying the groundwork for a hike in June."

"That dovish read by some may have been influenced by witnessing the decent fall in short-dated GBP swap rates – even though that move was probably driven by lower oil prices. And if oil prices were lower and GBP rates were falling faster than EUR rates, that should have been EUR/GBP bullish, based on the relationship between oil, rates and FX we have seen since the war broke out."

"But no, EUR/GBP fell on the day. That may have been a function of month-end flows, where equity portfolio managers were rebalancing into UK asset markets after their underperformance in April."

"Clearly, it is a confusing picture and one that leaves major EUR/GBP support vulnerable at 0.8600/8610 in holiday-thinned trading conditions. We think sterling should be underperforming soon – but both we and most investors have been saying that for a long time."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)