Hawkish ECB

The European Central Bank raised interest rates by 50 basis points as expected and vowed to "stay the course" in order to achieve a timely return of inflation back to the 2% target. In this spirit, it communicated explicit intention for another such move in the next meeting in March, maintaining its hawkish stance. ^[1]

Things get a bit murky beyond that date, as officials will need to assess the policy path based on the incoming data and projections, but President Lagarde succinctly stated that this will not be the peak. She did not commit to the size of next moves, saying that "It might be 50, it might be 25, it might be whatever is needed", but the intent for more tightening is clear. ^[2]

This is in line with a series of recent comments by various policymakers and in typical ECB fashion, leaks after the decision pointed towards that. According to Reuters sources, officials appear to expect at least two more hikes. ^[3]

A day earlier, when the US Fed downshifted again, Chair Powell had recognized that the "disinflationary process has started" ^[4], even though he stressed that prices are still too high. Ms Lagarde took a similar approach, although definitely did not go as far, noting that inflation risks are now "more balanced".

Dovish BoE

The Bank of England did not offer any surprises either with 0.5% increase that brought rates to 4.0% with a 9-2 majority, with two dissenters voting again for a pause. Officials took the edge of their rhetoric by dropping the "forceful" reference of the previous statement, while softening guidance to "further tightening" if necessary. ^[5]

Despite the two dissenters and the dovish shift in the communique, the BoE did not outright signal a halt in the rate increase cycle. Speaking on CNBC after the decision, Governor Bailey tempered such talk, stressing that "I'm not saying this it, we are done". ^[6]

A few weeks back, he had noted that although he does not endorse market pricing for 4.5% terminal rate, the bank does not view this as out of line, which is an indication that further tightening could ensue. ^[7]

EUR/GBP Analysis

The pair jumped to the highest levels since September after the dovish BoE hike, but faced pressure after the decision by the ECB. The move was largely priced in, while markets reacted negatively to the comments around inflation and the not-overly hawkish messaging in regards to the post-March messaging.

However, European policymakers remain very aggressive in their pursuit to restore price stability and have more ground to cover, having started tightening later and from a lower point.

As such, EUR/GBP ended Wednesday in the green and tries to stay on the front foot today, now having 0.9000-6 in its eyesight. However, it may be early to talk for an advance beyond this area, which could challenge 0.9115.

On the other hand, the rise seems overextended, with the Relative Strength Index (RSI) at the most overbought levels since the September spike. This can create pressure towards the EMA200 (0.8800), but sustained weakness below this level does not look easy, since the downside appears well protected.