British Pound extends losses against Euro with BoE decision in focus

The British Pound (GBP) experienced a setback against the Euro (EUR) on Wednesday following the Bank of England's (BoE) decision-making process, which has garnered significant attention. The GBP struggled as traders reduced their positions before the BoE's interest-rate decision scheduled for Thursday, while UK inflation data remained in line, failing to elicit a strong market response. As of the latest update, the EUR/GBP pair is hovering around 0.8573, marking a slight increase of approximately 0.10% for the day.

Analysts from Brown Brothers Harriman anticipate a likely decision from the BoE to maintain the policy rate at 3.75% for an eighth consecutive meeting, given the data showing contained UK inflation and ongoing labor market slack. Market pricing suggests a more aggressive stance, with predictions of 100 basis points (bps) of BoE rate hikes to 4.75% over the next year.

However, BBH remains cautious, noting that the BoE might not tighten as much as anticipated, citing the already subdued UK economy and the Bank Rate of 3.75% being near the upper range of the BoE's neutral rate estimation of 2% to 4%. They also anticipate that fiscal policy will become more restrictive.

Société Générale analysts, on the other hand, argue that the recent drop in EUR/GBP below 0.86 has likely reached its peak and that the market should now focus on fiscal policy. They highlight that "the key event in the coming weeks is really the Budget, on October 28, rather than either tomorrow’s MPC meeting, or the November 5 one, when the market currently prices in a hike."

Despite expecting 1.2% growth in both the US and Eurozone next year, they caution that the UK's fiscal austerity could cast doubt on the UK's economic outlook. Given that UK interest rates are already 125 basis points higher than those in the Eurozone, they believe the urgency for further tightening by the BoE is less pressing, warning that a narrowing rate differential and fiscal policy concerns suggest EUR/GBP could dip to 0.88 by Q4.

From a technical standpoint, EUR/GBP is showing limited follow-through after a rebound from below 0.8500 in mid-July, with gains capped by the 0.8600-0.8610 region. This recent high acts as resistance and aligns closely with the 100-day Simple Moving Average (SMA) at 0.8595, presenting a firm barrier for buyers. The Relative Strength Index (RSI) is near 51, indicating mildly positive but broadly balanced momentum, while the low Average Directional Index (ADX) suggests weak trend strength, leaving the price oscillating between nearby moving-average barriers.

A decisive break above the 100-day SMA at 0.8595 and the 0.8600-0.8610 resistance region could open the door towards the 200-day SMA at 0.8645. Conversely, a break below the 50-day SMA near 0.8554 would expose the psychological 0.8500 mark and potentially the July low around 0.8455.