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Talking Points

- The BOE needs to balance a potentially tricky combination of Brexit, high inflation and low growth.

- ECB President Mario Draghi will reveal the latest staff economic forecasts on growth and inflation.

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The Bank of England Needs to Bolster Market Confidence

The BOE is expected to keep all current monetary policy settings unchanged today but governor Mark Carney will need to confirm to the market that he remains ready to act if above-target inflation – currently running at 3.1% - remains entrenched. The central bank hiked interest rates by 0.25% at the last meeting in November, the first time in a decade, and must show the market that it can, and will, move again if needed. Persistently low UK growth is also a problem for the BOE governor, especially as Brexit continues to weigh on the UK economy, despite divorce talks moving to the second phase.

The Latest ECB Staff Projections Will Likely Show Higher Growth

The ECB is also expected to leave monetary policy unchanged Thursday but the central bank will release its latest, quarterly, staff economic projections for inflation and growth. Today’s figures are produced jointly by euro area national central banks and ECB staff members and give an in-depth insight into the euro area economy. September’s GDP projections of around 1.8% for 2018 and 2019 are likely to be upgraded to reflect growing economic confidence, while inflation projections are expected to be upgraded from 1.5% but not close enough to 2% to prompt any thoughts of ECB monetary tightening.

EUR/GBP Remains in a Trading Range

EUR/GBP has been stuck in a trading band since mid-September as investors stood back and waited for the latest Brexit developments. Last week, the chief EU Brexit negotiator Michel Barnier said that ‘sufficient progress’ had been made on the first round of talks and that discussions should now move forward to the second phase, including post-Brexit trade agreements.

EUR/GBP Price Chart – Daily Timeframe (April - December 14, 2017)

EUR/GBP Edgy Ahead of BOE and ECB Monetary Policy Meetings

Chart by IG

Investor Data Paint a Neutral to Negative Picture for EUR/GBP

IG Client Sentiment data show 51.9% of traders are net-long EUR/GBP with the ratio of traders long to short at 1.08 to 1. The number of traders net-long is 3.9% higher than yesterday and 3.0% lower from last week, while the number of traders net-short is 3.2% lower than yesterday and unchanged from last week. We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests prices may continue to fall. Positioning is more net-long than yesterday but less net-long from last week. The combination of current sentiment and recent changes gives us a further mixed EURGBP trading bias.

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--- Written by Nick Cawley, Analyst

To contact Nick, email him at nicholas.cawley@ig.com

Follow Nick on Twitter @nickcawley1