The Euro rose against the British Pound last week in the aftermath of the ECB. Is there more room for EUR/GBP to extend gains, or is momentum stalling? Get your market update from ddubrovskyFX here:
The latter was as expected, but the ECB’s change in rhetoric was not. Arguably, the ECB is one of the more dovish central banks compared to its G-10 peers. But even the ECB has been starting to acknowledge the rising inflationary pressures that the Euro area is facing. In January, headline CPI clocked in at 5.1% y/y versus 4.4% anticipated. The core gauge clocked in at 2.3% y/y against 1.9% estimates.
Recently, ECB Chief Christine Lagarde noted that the risks to the inflation outlook are ‘tilted to the upside’. She did mention though that their March projections will offer a better judgement. ECB policymaker Francois Villeroy did mention that the market last week might have been ‘too strong’. Markets are pricing in at least 40 basis points of tightening through the end of this year.
The BoE has had a head start to its tightening cycle, with the benchmark lending rate sitting at 0.5% after last week’s hike. Overnight index swaps are pricing in five more to come by December. With markets already pricing in an aggressive BoE, this could leave more room for traders to bid up ECB hawkish bets should inflation continue rising. That could offer further upside potential for EUR/GBP.
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