Will a hawkish ECB strengthen the euro today?

The pound shot higher on Wednesday as investors reacted to the UK’s latest consumer price index.

Sterling appears to be consolidating these gains this morning, with GBP/EUR flat at €1.2037 and GBP/USD buoyed at $1.3142. GBP/CAD is rangebound at C$1.6496, while GBP/AUD and GBP/NZD are holding steady at AU$1.7619 and NZ$1.9265, respectively.

Looking ahead, could hawkish forward guidance from the European Central Bank (ECB) help to turbocharge the euro this afternoon?

What’s been happening?

The pound strengthened during yesterday’s trading session, following the release of the UK’s latest CPI figures.

March’s figures reported domestic inflation rocketed to a new 30-year high of 7%. While this stoked concerns over the UK’s cost-of-living crisis, it also reinforced expectations for another Bank of England (BoE) rate hike next month, which underpinned Sterling sentiment.

At the same time, the euro was initially trapped in a narrow range through yesterday’s session as EUR investors were reluctant to make any aggressive bets ahead of the European Central Bank’s latest interest rate decision.

However, EUR exchange rates later rallied as the single currency’s negative correlation with the US dollar saw it firm as the latter fell.

This drop in the US dollar appeared to be driven by a pullback in US Treasury yields and a modest improvement in risk appetite.

What’s coming up?

In the spotlight today will undoubtedly be the ECB’s latest interest rate decision.

No policy changes are expected from the bank this month, placing the focus on the bank’s forward guidance. With the minutes from the ECB’s March meeting highlighting significant support amongst policymakers to accelerate policy normalisation, EUR investors will be hoping for a more hawkish outlook from the bank.

Any hints from the ECB regarding a possible acceleration of the bank’s monetary tightening could propel the euro higher this afternoon.

For USD investors the focus today is likely to be on the on the latest US retail sales figures. Will a bump in sales growth last month reflect positively on the US dollar?

Meanwhile, in the absence of any notable GBP data the pound could struggle to find any strong directional bias, particularly amidst the thin trading conditions ahead of the long Easter weekend.