Euro Heads Toward a Make-or-Break Policy Week Versus Sterling

Euro Heads Toward a Make-or-Break Policy Week Versus Sterling

(Bloomberg) — The euro’s January consolidation against the faces a test next week, when the European Central Bank meets and U.K. data may decide whether the Bank of England cuts interest rates.

Options traders see a low risk so far for a breakout from the pair’s month-long range and volatility remains suppressed, keeping hedging costs low for those taking no chances. Attention will be on Thursday’s outline of the ECB’s strategic review, particularly its implications for shifting the outlook among policy makers. That will be followed by the U.K. Purchasing Managers Indexes for January on Friday.

While the ECB is just expected to monitor the impact of its policy so far, money market traders have started to assign a higher probability for a BOE cut, with current pricing at around 75% for a move at its Jan. 30 meeting. A combination of dovish comments from officials and soft U.K. data has weighed on the pound recently, yet the euro has been unable to significantly benefit, with rallies versus the dollar met this week by profit-taking interest.

The euro reversed early losses versus sterling on Friday and stood at 85.21 pence per euro after data showed that U.K. retail sales unexpectedly fell in December. One-week implied volatility trades at 6.28%, near the lower end of its range since early 2018 and compared to a past-year average of 7.76%. The breakeven into next week’s events currently stands at 64 pound pips, according to Bloomberg pricing, suggesting traders are not expecting any fireworks next week.

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