.EUR/GBP consolidates at the 0.8450 area after hitting new yearly highs

• EUR/GBP is consolidating at the 0.8450 area, and the ECB’s Lagarde’s latest comments did not provoke any reaction from the euro.
• The pair reached new yearly highs at 0.8475 at the beginning of the session.

The EUR/GBP it hit fresh yearly highs at 0.8475 on Friday, but has since pulled back to consolidate around the 0.8450 area, where it is trading largely unchanged on the session. ECB President Christine Lagarde’s latest comments to the EU parliament did not add anything new to her comments at the press conference after last week’s ECB meeting. Recall that, last Thursday, his refusal to reiterate an earlier statement that 2022 rate hikes are unlikely and a greater focus on upside inflation risks triggered a rally for EUR/GBP from new multi-year lows. below 0.8300.

Last week, the BoE also surprised markets aggressively, with four of the nine members of the Monetary Policy Committee unexpectedly voting for a 50bp rate hike (the BoE raised rates to 0.5%, as expected). . These calls for a larger move were based on near-term inflation fears, with the bank now expecting headline CPI to break above 7.0% in April when UK energy regulator Ofgem raises the price cap for the gas. The BoE’s hawkish surprise, while enough to briefly push EUR/GBP below 0.8300 and towards a test of late 2019/early 2020 lows in the 0.8280 area, was negated by the surprise turnaround in the position of the ECB.

The bottom line was that EUR/GBP enjoyed its best week since April 2021, rallying over 1.7% to current levels in the mid-0.8450s. As traders reassess their expectations on the outlook for the BoE/ECB policy divergence, some think EUR/GBP could still go higher. In the second quarter, the UK faces a cost of living crisis with taxes and energy costs set to rise in tandem, factors likely to help keep the BoE’s terminal interest rate capped relative to other parts of the G10. .

Meanwhile, if over the same time frame the Eurozone continues to face higher-than-expected inflation, the likelihood of the ECB accelerating its QE taper and signaling a rate hike in the fourth quarter is high. That could continue to support EUR/GBP in the medium term, perhaps facilitating a test of the next key resistance around 0.8600.

In the short term, analysts signaled a risk of some euro profit-taking after last week’s big moves, especially if ECB policymakers attempt to push back overly aggressive money market pricing. Lagarde’s policy comments on Monday certainly don’t suggest further bullish momentum in the near term, and a more dovish speech from ECB Chief Economist Philip Lane later in the week will also be worth noting. Any short-term pullback in EUR/GBP can find support at 0.8425 in the form of January highs.

Additional technical levels