EUR/GBP to dive to fresh year lows as BoE moves closer to raising rates – MUFG

The main event risk yesterday was the Bank of England’s latest policy meeting. It has helped to reinforce the pound’s recent strengthening trend with EUR/GBP breaking below support at the 0.8500-level while GBP/USD is holding up above 1.39. Economists at MUFG Bank weigh up market impact from BoE policy update.

BoE takes a small step closer to tightening policy

“The overall message from the BoE is that rate hikes could start sooner but the scale of the hike cycle should be only modest and the pace gradual. It has helped to dampen upside for the pound as the BoE moved a step closer to tightening policy yesterday.”

Recently we have become more confident in our bullish outlook for the pound on the back of encouraging COVID developments in the UK. Yesterday’s BoE policy update has not changed our view.”

“We are maintaining a short EUR/GBP trade idea in anticipation that the pair will fall to fresh year to date lows. Policy is set to diverge as the BoE moves closer to raising rates while the ECB has signalled strongly it does not plan to raise rates over their forecast horizon by setting a higher hurdle for future rate hikes in their new forward rate guidance.”