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EUR/USD, EUR/GBP Braced For a Central Bank Bonanza

EUR/USD, EUR/GBP Braced For a Central Bank Bonanza

Nick Cawley, Senior Strategist
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EUR/USD, EUR/GBP Prices, Charts, and Analysis

  • EUR/USD - may fade further if the Fed acts on soaring inflation.
  • EUR/GBP - the Bank of England is in a difficult situation.

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There are three major central bank monetary policy decisions scheduled over the next 24 hours or so that will likely boost volatility in two of the largest currency pairs. In short, the Fed is likely to trim its bond-buying program further and increase interest rate hike expectations today, the Bank of England is in a quandary whether to hike rates or not at tomorrow’s meeting, while the ECB will likely announce that the end of one bond-buying program will be partially replaced by another, flexible asset purchase program. While recent hard data from the US and the UK suggest monetary tightening is needed imminently, the damaging effect on economic growth caused by the latest covid-variant Omicron suggests otherwise. With financial markets starting to wind down for the Christmas break, these three central bank decisions may have a short-term, out-sized effect on their respective currencies.

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With the Fed expected to indicate further monetary policy tightening, and the ECB expected to leave policy levers unchanged, EUR/USD looks primed to fall further. With US inflation running at a near 40-year high of 6.8%, the Fed’s view over the past few months of surging price pressures as ‘transitory’ is beginning to look like a policy mistake. The Fed needs to get ahead of inflation now and the US central bank is fully expected to increase the rate of bond tapering from $15 billion to $30 billion a month, and to highlight the path of rate hikes in 2022 and 2023. This should reinforce the US dollar at current levels and push it higher over the coming weeks and months. The ECB is not expected to change any policy settings tomorrow and they may well announce that the Asset Purchase Program (APP) will pick up the slack when the Pandemic Emergency Purchase Program (PEPP) ends in March 2022. With inflation also surging in the Euro Area, alongside new Omicron cases, the ECB will have a difficult backdrop when it presents its 2022 policy outlook tomorrow.

EUR/USD continues to stagnate near recent multi-month lows and faced with a diverging monetary policy outlook may well test these lows again. A confirmed break below the recent 1.1185 low would likely see 1.1000 as the next target.

EUR/USD Daily Price Chart December 15, 2021

Retail trader data show traders are net-long of EUR/USD by a ratio of 2.06/1, and when this is combined with recent daily and weekly positional changes this gives us a stronger EUR/USD bearish contrarian trading bias.

EUR/USD Bullish
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily -13% 20% 5%
Weekly -10% 20% 6%
What does it mean for price action?
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The Bank of England is stuck between a rock and a hard place after recent economic data highlighted the strength of the UK jobs market and showed inflation hitting a 10-year high. In normal circumstances, this data would force the BoE to hike rates, but the effects of Omicron may temper the rate-setters’ enthusiasm for higher rates. If, as is most likely the case, the BoE leaves rates unchanged tomorrow, they are very likely to say that rates will be hiked at the next policy meeting in February.

EUR/GBP has reversed its recent bout of strength that saw it touch the 0.8600 level and is now trading either of 0.8500 ahead of tomorrow’s decision. An old swing low at 0.8403 and the cluster of late-November lows all the way down to 0.8380 may all come into play if the BoE surprises and hikes interest rates.

EUR/GBP Daily Price Chart December 15, 2021

Retail trader positioning currently shows a mixed EUR/GBP trading bias.

EUR/GBP Bullish
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily -7% 27% 7%
Weekly 4% 8% 6%
What does it mean for price action?
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What is your view on EUR/USD and EUR/GBP – bullish or bearish?? You can let us know via the form at the end of this piece or you can contact the author via Twitter @nickcawley1.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.