Market volatility cooled this past week, but there were a few key events that had the potential to generate solid short-term opportunities, including two central bank policy events.
Out of six discussions, only one scenario/price outlook forecast saw both fundie & technical arguments triggered to become a potential candidate for a risk management overlay. Check out our review on that discussion to see what happened!
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EUR/GBP: Wednesday – May 8, 2024
EUR/GBP: 1-hour Forex Chart by TradingView
On Wednesday, our strategists prepared for the upcoming monetary policy statement from the Bank of England, which would likely spark big volatility for the British pound this week.
In our Event Guide for the BOE Statement, we discussed how recent sticky inflation data in the U.K. supported the general market consensus that the BOE would lean slightly hawkish on their statement, and that it was expected the Monetary Policy Committee would likely vote 8-1 to hold the main policy rate at 5.25%. For that scenario, we discussed a bullish setup on GBP/USD to watch.
But in case where the BOE came out more dovish than expected, we focused on EUR/GBP. Given the strong uptrend since the start of May and the euro’s recent out performance as Euro area data continues to show rising optimism and economic stability in recent months, we thought the a dovish outcome may draw in both fundamental and technical buyers into EUR/GBP.
Well, the Bank of England surprised the markets this week with a more dovish than expected event, signaled by a 7-2 vote to hold and comments from BOE Governor Bailey that signaled when cuts do happen, they may be “more substantial” than what markets currently expect.
This outcome prompted an immediate spike lower in the British pound, but the move was limited, possibly on “buy-the-rumor, sell-the-news” profit taking as Sterling saw pressure leading up to the event. It’s also likely that traders were quick to reduce risk on Sterling after the event given that U.K. GDP was right around the corner on Friday to potentially influence GBP sentiment once again.
Speaking of the U.K. GDP event, that update came in much better than expected as it essentially signaled the end of the U.K. recession. This prompted a bull rush into Sterling, not only further profit taking from the BOE event, but also likely a reversal of fresh shorts that the BOE Statement may have brought in.
EUR/GBP pulled back from the uptrend ahead of the BOE event, creating a solid technical uptrend buying opportunity if a dovish scenario played out, and for those who went with the uptrend there ahead of the event, the odds are likely of a positive outcome with active risk management & profit taking ahead of U.K. GDP.
For those who waited for the BOE event results to take a bullish lean on EUR/GBP, odds are that you saw a slightly negative outcome, but that was highly depended on the risk management plan as EUR/GBP traded higher after the event, but then lower thanks to U.K. GDP updates.
Overall, we’d rate this discussion “not likely to neutral” in being supportive of a positive outcome. Our asset selection and bias was generally right, but with another top tier U.K. event following the BOE event, individual risk and trade management decisions would have been a huge factor towards the final outcome.
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