- EUR/GBP briefly dipped back below the 0.8300 level on Wednesday for the first time in nearly one month.
- The euro continues to underperform given its economic exposure to heavily sanctioned Russia, whilst risk-sensitive sterling rose with risk assets.
- BoE and ECB policymakers noted that recent geopolitical events add upside inflation/downside growth risks as this month’s meetings loom.
EUR/GBP briefly dipped back below the 0.8300 level on Wednesday, the first time the pair has done so in nearly one month, though it was unable to test last month’s lows in the 0.8280s. The euro continues to struggle amid concerns about the Eurozone’s economic exposure to the Russian economy and how recently imposed harsh sanctions by the West on the latter might damage growth. Meanwhile, sterling performed well in tandem with its other risk-sensitive G10 peers amid a broad upturn in the market’s appetite for risk.
At current levels near 0.8310, the pair trades with losses on the day of just over 0.3%. Both ECB and BoE policymakers have been warning that recent geopolitical developments and associated commodity price upside adds upside risks to the inflation outlook and downside risks to growth. What is yet to be determined is how the ECB navigates the dilemma that this dynamic presents.
Do they slow tightening plans to soothe the economic hit but risk further exacerbating inflation, or do they press ahead with tightening to combat inflation regardless of downside growth risks and risk sending their respective economies into recession? While some ECB members have in recent days indicated they prefer the former option of these choices, Wednesday’s hotter than expected flash February HICP inflation reading further complicates things for the ECB.
Though focus, for now, remains very much on the Ukraine war, which arguably means that downside risks for the economically-exposed euro remain elevated, next week’s ECB meeting and the following week’s BoE meeting might prove the major catalysts for EUR/GBP this month. Any signs of growing BoE/ECB divergence (BoE more eager to tackle inflation, ECB more dovish amid growth concerns) would likely be enough to push the pair back below 0.8300 in a more meaningful way. Bears will continue to target the late-2019/early-2020 lows in the 0.8280 area.