FX.co ★ EUR/GBP: euro sinks as ECB steps back from hawkish stance

The US dollar is anticipating the results of the Fed emergency meeting which will be announced later. Against this backdrop, there is unrest in the foreign exchange market, especially in the dollar pairs. The greenback is either gaining momentum or losing ground, allowing opponents to counterattack. No one knows for sure how the unscheduled meeting of the members of the Board of Governors will end: either with a "declaration of intent" or an increase in the key interest rate. Therefore, trading dollar pairs is extremely risky at the moment: the dollar can either significantly strengthen or start another correction.

In these conditions, it is recommended to stay in a wait-and-see mode and refrain from trading dollar pairs. Traders may also turn their attention to some cross pairs, for example, the euro/pound pair. It is currently going through a decline as the euro is weak and the pound is gaining momentum.

Recently, the euro has come under pressure after it turned out that the stance of ECB President Christine Lagarde was less hawkish than expected. In fact, Lagarde never showed any signs of a hawkish stance. By and large, traders drove themselves into a trap by making hasty conclusions. Following the results of the February meeting of the European Central Bank, markets got an impression that Jerome Powell and Christine Lagarde began to gradually move in the same direction. During her final press conference, the head of the ECB said that "inflation in the euro area, apparently, will remain elevated longer than previously expected." At the same time, she did not repeat her previous thought that "a rate hike is unlikely in 2022." In response to a related question from a journalist, she stated that "the ECB does not make unconditional promises." She also added that the regulator would assess the situation at the March meeting when updated forecasts of the Central Bank will be published.

This was enough for the market to interpret the rhetoric of Lagarde's accompanying statement in favor of the European currency. So, the euro jumped by almost 200 pips against the pound just 2 days after the meeting. The rally happened even despite the fact that the Bank of England has already raised the rate last autumn and declared further tightening of monetary policy in 2022. The pair renewed the monthly high and got stuck in one place, anticipating new drivers. However, the next piece of news sent the euro into a deep knockdown. The fact is that last Thursday, Christine Lagarde clarified her position on monetary policy, completely leveling all the assumptions about her hawkish views. She urged not to rush with a rate hike. In her opinion, this step will not solve the existing problem (that is, it will not slow down the growth of inflation in the eurozone), but will create new challenges instead. Lagarde stressed that the process of recovery in the European region in this case could be "significantly worse" and jobs "would be at risk."

These comments surprised market participants: the euro lost ground across the board, including against the pound. EUR/GBP dropped by 100 pips and kept trading in the bear market. It is likely that bearish sentiment will continue to prevail on the pair, given the difference in the policies of the ECB and the Bank of England. Most economists polled by Reuters indicated that the UK regulator is likely to raise interest rates at its March meeting and the next time – at the meeting in May. The likelihood of this scenario will be greatly increased if the data on UK inflation shows acceleration of prices. According to preliminary forecasts, annual headline inflation will accelerate to 5.5%. The core consumer price index should come out at 4.3%. If this is true, this will mean that core inflation has been rising for the sixth month in a row. If the reading comes out at least at the predicted level, the euro/dollar pair will go another 100 pips down from the current levels. In any case, the difference between the monetary policies of the ECB and the Bank of England will put background pressure on the pair. So, it is advisable to use any upside pullbacks for opening short positions.

From a technical point of view, the EUR/GBP pair is trading within a descending channel. There is a full-fledged downtrend, confirmed by the Ichimoku indicator which has formed its bearish signal of "line parade." On all higher time frames (H4, D1, W1, except for MN), the price is located between the middle and the bottom line of the Bollinger Bands indicator, which is located in the extended channel. The signals of the trend indicators are confirmed by the MACD oscillator which is currently in the overbought area. The lower line of the Bollinger Bands indicator on the daily chart serves as a support level (the downward target) and corresponds to the price level of 0.8280. It will be a good strategy to take profit in this area and stay in a wait-and-see mode.