Bulls in both EUR/USD and GBP/USD were able to cash in profits ahead of today’s top event risk Thursday.
While this profitable week so far increases hope for more profitable moves to come, we advise some caution. Today’s central bank decisions may turn the tide since it will be difficult for policymakers to live up to the market’s extremely hawkish expectations. The market began to price in a 10bp ECB rate hike for July while the ECB’s expected policy path is further set to diverge to other central banks.
To sum up, if the ECB grows less dovish (as the market began to price in), we could see another upward movement in the EUR/USD.
Most attention will be paid to the ECB press conference at 13:30 UTC.
EUR/USD – ‘Escape the rectangle’
We will focus on prices either above 1.1390 (bullish) or below 1.12 (bearish). As long as the euro trades within the rectangle, we will maintain a neutral stance. A break above 1.1390 could open the door for another leg up towards 1.1480 and 1.1520. A break below 1.12 and further 1.1180 could send the euro tumbling towards 1.0950.
BoE decision due at 12:00 UTC
The Bank of England is expected to raise interest rates to 0.5 percent today which would complete the first back-to-back increase since 2004. The 0.5 % key rate is the threshold where policymakers can start paring back the 895-billion-pound asset portfolio. The question now is whether more rate hikes will follow. Some economists fear that maybe more hikes are needed and perhaps at a faster pace given the scale and persistence of inflation. Economists however are far more cautious than investors as they currently see the BoE key rate at 0.75 percent in December, while investors are betting the BoE will lift the key rate to 1 percent by June.
GBP/USD – Captured between 1.3690 and 1.3450?
With no surprises from the BoE, we expect the cable to remain trading between 1.3690 and 1.3450. A break above 1.3710 could increase bullish momentum towards 1.3830 but much of the BoE’s hawkishness is already priced in into the cable’s recent upward move. For bears to regain control it would need a break below 1.3350.
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