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The Euro could be poised to take fresh value off the British Pound if Thursday sees the European Central Bank signal it is about to raise interest rates and signal a number of further hikes are likely over coming months, but analysts warn Euro strength could be brief.

The fundamental shift in stance at the ECB comes amidst a dearth of top-tier event risk for the Pound which saw some volatility over recent days as global stock markets fluctuated and political intrigue came courtesy of a confidence vote in Prime Minister Boris Johnson.

"The no-confidence vote may have been a big issue politically but as far as the markets are concerned it doesn’t seem to have made a ripple. GBP’s trade-weighted index is virtually unchanged," says Marshall Gittler, Head of Investment Research at BDSwiss Holding Ltd.

The Pound would however likely fall against the Euro on Thursday if the ECB signals a July rate hike of 25 basis points and validates market expectations for a potential further 75 basis points of hikes for the remainder of the year.

This implies at least three further 25 basis point hikes in 2022.

Should the ECB strike a more hawkish tone - i.e. potentially signalling a 50 basis point hike at some point in 2022 - Euro exchange rates could make a meaningful rally. (Set your FX rate alert here).

This would put pressure on the Pound to Euro exchange rate which could test the 2022 support zone located between 1.16 and 1.1650:

Above: GBP/EUR at daily intervals showing a generalised area of support.

The exchange rate has not closed below here in 2022 and a decidedly bullish ECB could mean a new milestone is reached that would favour those holding euros and looking to buy pounds.

In a new research note BofA say it now sees a cumulative 150 basis points of Deposit Rate hikes this year, up 50bp on their previous assumptions.

They see sizeable 50bp moves in both July and September which is more hawkish than the market consensus which currently anticipates a more cautious 25bp move in July.

"Our call was already more hawkish than consensus, and is even more so now," says Ruben Segura-Cayuela, Europe Economist at BofA Europe in Madrid. "We can't see the ECB avoiding a 50bp move by September, at the latest."

Such a surprise could boost Euro exchange rates initially, but "we continue to worry this is too much too fast," says Segura-Cayuela.

Above: Consensus vs BofA refi (and deposit rate) forecasts for end-22. "We may be macro-bears, but our ECB call for 2022 has been on the hawkish side of consensus for a while" - BofA. Image: Bloomberg, BofA Global Research.

Analysts at BMO Capital Markets are however anticipating the ECB to emphasise the need for a 'gradual pace' of rate hikes, which could underwhelm the more hawkish section of the market.

"But we also do not expect the central bank to take larger rate hikes completely off the table," says Stephen Gallo, European Head of FX Strategy at BMO Capital Markets.

Gallo does not believe the ECB will provide the kind of shock required to materially shake the Euro on Thursday, but a "confirmation rally" in the Euro is possible by ways of an immediate response.

However, the Euro is expected to retrace some of the gains it might make.

There could therefore be something for both euro buyers and sellers as the ECB tries to navigate a windy path to higher interest rates in an uncertain economic outlook.

For the Pound, the Bank of England will meanwhile draw focus on June 16 when another 25 basis point rate hike will likely be delivered.

The rate hike comes amidst surging UK inflation rates and a slowing economy, contradictory forces that do not necessarily present a supportive combination for the Pound.

"A bigger issue for UK financial markets at the moment is the country’s move in the direction of stagflation. This will keep UK real yields deeply negative and means GBP will trade at a significant discount to fundamental equilibrium for some time," says Elias Haddad, Senior Currency Strategist at Commonwealth Bank of Australia.