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16 Mar 2023

EUR/GBP recovers further from two-month low set on Wednesday, retakes 0.8800 ahead of ECB

  • EUR/GBP gains strong positive traction and draws support from a combination of factors.
  • Easing fears of fresh turmoil in the European banking sector boosts the shared currency.
  • The ECB-BoE policy divergence lends additional support ahead of the key ECB decision.

The EUR/GBP cross builds on the previous day's late recovery move from the 0.8720 area, or a nearly two-month low and gains strong follow-through positive traction on Thursday. The momentum remains unabated through the mid-European session and pushes spot prices back above the 0.8800 round-figure mark in the last hour.

A positive development surrounding the Credit Suisse saga, along with the prospects for a jumbo rate hike by the European Central Bank (ECB), benefits the shared currency and acts as a tailwind for the EUR/GBP cross. In fact, the troubled Swiss bank announced that it will exercise an option to borrow up to $54 billion from the Swiss National Bank (SNB) to shore up the liquidity. This helps ease fears about fresh turmoil in the European banking sector. Adding to this, reports on Wednesday indicated that ECB policymakers are still leaning towards a 50 bps lift-off later today.

It is worth mentioning that investors had begun to doubt if the ECB will stick to its commitment for another big interest rate hike, especially after last week's collapse of two mid-size US banks - Silicon Valley Bank and Signature Bank. However, a source close to the ECB's rate-setting Governing Council said there was no fundamental change in the outlook, while the Eurozone economy is picking up strength and inflation is expected to remain high for years. In contrast, the markets are now pricing in a 50% chance that the Bank of England (BoE) will pause its rate-hiking cycle next week.

In fact, interest rate futures suggest a 50% chance that the BoE will leave rates unchanged and an equal possibility of a smaller 25 bps rate hike. This further contributes to the British Pound's relative underperformance and provides an additional lift to the EUR/GBP cross. Thursday's strong move up, meanwhile, follows the overnight failure to find bearish acceptance below the 100-day Simple Moving Average (SMA) and supports prospects for additional gains. Traders, however, might prefer to wait on the sidelines ahead of the key central bank event risk - the ECB policy decision.

Technical levels to watch

 

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