EUR/GBP stabilises in 0.8350 area in tentative trade ahead of “Super Thursday”

• EUR/GBP has stabilised in the 0.8350 area, with traders clearly tentative and constrained in the run-up to “Super Thursday”.
• Upside Eurozone inflation surprises this week raise the risk of a more hawkish ECB, some analysts said.
• But EUR/GBP upside risks are limited by expectations for BoE policy tightening, with ING still targetting a drop below 0.8300.

EUR/GBP has stabilised in the 0.8350 area, with traders clearly tentative and constrained in the run-up to “Super Thursday” when the ECB and BoE will both be announcing monetary policy decisions. The final Eurozone manufacturing PMI survey for January was weaker than expected, but any negative impact on the euro that might have been was canceled out by better-than-expected Eurozone jobless figures, with the unemployment rate dropping to 7.0% in December. That is a new record low for the Eurozone.

Labour market strength is good news for the ECB, but ahead of Thursday’s rate decision, the central bank is also having to digest negative news on the inflation front. Flash data released on Monday revealed that Spanish and German HICP inflation dropped less than expected in January and data on Tuesday revealed the same for France. Attention now turns to the flash Eurozone aggregative HICP inflation reading out on Wednesday for confirmation that inflationary pressures, though lower in January, didn’t drop back as much as hoped.

“If the eurozone inflation data also surprises on the upside tomorrow the market might bet on a more hawkish ECB,” analysts at Commerzbank said on Monday, adding that this could offer the euro some support. But EUR/GBP’s upside risks as a result of potential ECB hawkishness are limited by expectations that the BoE will continue its hiking cycling with another 25bps move. Indeed, with UK interest rates set to hit 0.50%, the BoE is also expected to announce quantitative tightening plans. “While we do not expect the BoE to start QT (Quantitative Tightening) this week, it may signal when it could begin – probably May, in our view," said analysts at Berenberg.

ING thinks that the rebound in EUR/GBP that saw it jump from just above 0.8300 on Monday to current levels around 0.8350 should have “short legs”. “The prospect of BoE hiking on Thursday should keep the appetite for the pound quite elevated, the bank continued, adding that “we keep targeting a move below 0.8300 in the near term”.