Hawkish shift in the ECB stance on Thursday offered some support to the Euro, however it wasn’t a game-changer. On Friday, EURUSD breaks off the weakness seen since the start of the week as the ECB narrowed the gap with the Fed in terms of prospective pace of stimulus tapering following its Thursday meeting.

The European regulator revised upwards short-term and medium-term inflation forecasts, what basically became a signal that the bank models may underestimate persistence of some inflation pressures. In addition, there were concerns about transition of temporary inflation to permanent in the official statement and Lagarde’s comments. This means an increased risk that the ECB will reduce monetary support of the economy faster and more intensively. Nevertheless, until the Fed announces its policy stance in September, Euro gains will likely be capped by uncertainty related to the Fed view on inflation and potential response to it.

Technically the EURUSD breached upper bound of a downward channel in the first days of September and after the test of August high of 1.19, retreat towards support level of 1.18 followed. If the price manages to hold above confluence of support levels (pattern line and horizontal support) it will likely extends its rally next week eyeing repeated test of 1.19 handle:

European markets halted the weekly decline, as European monetary policymakers clarified that they are not cutting emergency monetary support, but only calibrating it.

Weak data for July could not prevent the GBP from going up, as the Bank of England began to fall back into hawkish policy as well, which overshadowed the slack in the data. On Wednesday, the head of the British Central Bank Bailey said that although the economic recovery in the country is reaching a plateau, the state of the economy has reached the minimum necessary for a rate hike. The pound showed little or no negative reaction after today's July GDP release indicated economic growth of just 0.1% on a monthly basis vs. 0.6% forecast. GPBUSD jumped 0.3%, consolidating near 1.39, where the pair bounced down due to broad-based dollar strengthening caused by the recent surge of risk-off sentiment.

In order for the pound to continue to rise, it is critically important that a noticeable hawkish shift in the regulator's position does not follow at the Fed meeting next week, as in this case, the prospect of higher interest rates in the UK will be offset by expectations of higher bond yields in the US. The risk of such an outcome is high, given that the key central banks of the Old World have begun to gradually change their policy. If the Fed postpones this issue until December, it will be possible to expect the strengthening of the British currency against the dollar to the level of 1.40, otherwise the pound may erase its recent bullish potential: