EUR/GBP fell below 0.840 last week after a somewhat hawkish Bank of England meeting and an unwinding of long positions in EUR. The outlook suggests potential for the pair to exceed the recent 0.845 highs later this week.
Budget spending cuts may meet fiscal rules, but the gilt market is wary of possible mistakes in fiscal management, which could negatively affect sterling. UK inflation data is expected to remain stable around 5% in February, though it is not anticipated to impact the market substantially.
Market Reaction To Bank Of England
The EUR/GBP dip beneath 0.840 came after the Bank of England’s meeting leaned slightly towards the hawkish side, prompting some traders to trim their euro holdings. Those who were previously positioned for more strength in the shared currency were evidently caught off guard. Now, with that adjustment largely played out, there’s a reasonable expectation that the pair might push above 0.845 as the week unfolds.
On the fiscal front, planned cuts to public spending might technically align with existing rules, but investor confidence in public finances remains fragile. The gilt market is keeping a close eye on potential miscalculations in economic management, and if concerns deepen, the pound could come under renewed pressure. Any misstep in communication from policymakers might exacerbate these fears.
Inflation figures for February are forecast to stay close to 5%, a level that has been well anticipated. There is little reason to believe that these numbers alone will drive the market in a new direction, but if the data surprises meaningfully in either direction, adjustments to rate expectations could follow. That said, traders appear to have factored in the broad trend, leaving limited room for immediate reaction.
Short Term Market Outlook
For those navigating short-term movements, attention will likely remain on whether sterling continues to hold its ground after recent strength or if euro buyers regain control. With market positioning having shifted last week, further unwinding may not be as aggressive, making the path forward more dependent on external developments and broader risk sentiment.
