EUR/GBP pulls back to test bull's commitments below 0.8400

• EUR/GBP starts to correct the rally and dips back below 0.8400.
• The focus will be on the ECB on Thursday, addressing the Ukraine crisis. 

EUR/GBP was rallying on Wednesday to 0.8417 from a low of 0.8314 on the diverging policy expectations from the Bank of England and the European Central Bank that meets on Thursday. This will be a key and popular meeting among central bank watchers as the Governing Council has the unenviable task of being the first team from the major central banks to provide an assessment of the impact on the Ukrainian crisis on growth, inflation and monetary policy.

''Market expectations about the potential for rate hikes from both the BoE and the ECB this year have been pared back since the Russian invasion of Ukraine,'' analysts at Rabobank said.  ''However, while the market is still anticipating that the BoE could follow through with a third consecutive rate hike at its March meeting, the doves maintain the upper hand at the ECB.''

''Worries about Germany’s energy security increase the vulnerability of the EUR vs. the GBP.  This will likely slow any recovery in EUR/GBP and opens downside potential in the near-term,'' the analysts added. ''On the downside, the first level to watch is the bottom of the bear channel at around 0.827.  We would expect considerable support in the 0.8250-0.8200 area given that a break below would leave GBP eyeing up pre-2016 Brexit referendum levels.''

Meanwhile, although the EZ has more direct Russian trade exposure, the UK has greater financial market links through banks and assets. The war has also led experts to warn Brits will absorb one of the harshest blows to their finances in peacetime. The CEBR estimates living standards in the UK will drop at the worst rate since records began in the mid-1950s. Elevated inflation and weaker growth will cause a headache for both the BoE next week and Chancellor Rishi Sunak, who is preparing to deliver a spring statement on 23 March.

As for the ECB tomorrow, there is scope for downside if the central bank aggressively pivots to easing to relieve corporate stress, analysts at TD Securities argued, adding, ''but a sharp move higher is possible if inflation risks continue to dominate Largarde's message.''

''In our view,'' analysts at Rabobank said, warning of a more hawkish possibility, ''the ECB will need to provide a message of a delayed, but not derailed policy path. While the ECB is likely to be less willing to make any policy changes this month in the face of the current uncertainties, policy-makers are also likely to signal that they are taking inflationary pressures seriously and that it is willing to act if necessary,'' the analysts said. ''This suggests there is scope for the ECB to provide a more hawkish tone this week than many market participants are anticipating.''