How's EURGBP Expected to Fair After EU GDP Just Ahead of BOE

The Eurozone narrowly avoided a recession, but growth stagnation keeps the pressure on the shared currency while the British pound is steady ahead of an expected uneventful BOE meeting.

Euro Area Avoids Recession, But Rate Cuts May Follow

Preliminary figures show the Euro Area economy stagnated in the fourth quarter, narrowly avoiding a technical recession by the minimum requirement. Annual growth was just 0.1%, below expectations of 0.5%, while Germany also avoided recession with a 0.3% contraction, though the third quarter was revised upwards. Analysts note that the shared economy is heading into a prolonged weak period. However, markets reacted relatively positively, with stocks rising and the euro lower, as the slower growth raises pressure on the ECB to cut rates sooner.

Whether this trend persists may depend on upcoming inflation data. Consensus forecasts predict Euro Area annual CPI of 2.8% in January, marginally below December's 2.9%. Similarly, core CPI is anticipated to decline slightly to 3.3% from the previous 3.4%. High energy costs are viewed as a drag on growth and inflationary pressures. Investors will scrutinise any signs energy price rises may ease over winter, as European energy stocks have remained steady.

Enough Progress for the MPC to Reconsider its Stance?

The consensus among economists is that the BOE's Monetary Policy Committee (MPC) will leave monetary policy unchanged at its meeting tomorrow, on the 14th of February. Attention, however, will focus on the signals regarding future policy action, given the recent mixed economic data. The latest CPI figures showed inflationary pressures remain strong in the services sector, which may cause the MPC to be more cautious in declaring the fight against inflation is over.

Meanwhile, markets have moved ahead of economists' expectations, currently pricing in the first interest rate cut as early as May. The MPC could use the opportunity to remove previous references to the need for further tightening, which markets will likely interpret as an indication that the next policy move will be easing. Voting dynamics will also be scrutinised following a 6-3 split in favour of holding rates steady last month, with dissenters arguing for an increase. A shift towards a majority supporting holding rates steady but dissenters preferring a cut could deliver a powerful easing signal to markets, too.

With UK inflation currently higher than in the Eurozone, the ECB seems further ahead in moving towards lower rates, which may continue to place downward pressure on the euro rather than the pound. This could allow the sterling-euro exchange rate to keep appreciating should the MPC remain hesitant about signalling imminent easing.​

Double-Bottom For EURGBP?

The EURGBP currency pair appears poised to reach 0.85, potentially forming a double-bottom pattern as part of a range-bound movement. A rebound from this level could see prices retrace the recent decline to reach 0.8767 should support at 0.8567 be breached unless resistance is met at 0.8620 or 0.8715. A break below the swing support may pave the way for the next major floor of 0.8450 should 0.8513 be taken out, with interim levels expected to provide temporary support.

Source: SpreadEx / EURGBP

Key Takeaways

The Eurozone economy barely avoided recession in the last quarter, with annual growth at just 0.1%. Analysts believe the economy is heading into a protracted weak period, putting pressure on the ECB to cut interest rates. Upcoming inflation data will be watched closely for signs of easing price pressures. The BOE is not expected to change policy at its forthcoming meeting tomorrow. However, markets are pricing in an interest rate cut as early as May. The MPC could signal a shift towards easier policy in its assessment. With inflation in the UK higher than in the Eurozone, the ECB may move to lower rates first. This could weigh on the euro versus the pound if the MPC remains cautious on rate cuts.