- EUR/GBP gains ground around 0.8450 in Thursday’s early European session, gaining 0.35% on the day.
- Expectations for a rate cut by the BoE remain divided.
- An increase in Eurozone inflation raised doubts about the pace of ECB rate cuts this year.
The EUR/GBP cross trades on a stronger note near 0.8450 during the early European session on Thursday. The uptick of the cross is supported by the hotter-than-expected Eurozone inflation data, which raises doubt on the prospect of European Central Bank (ECB) interest rate cuts in September. Later in the day, the Bank of England (BoE) interest rate decision will take centre stage.
Consensus among market players is somewhat split over the upcoming interest rate announcement by the BoE on Thursday. The markets were pricing in a 66% odds of a quarter-point cut by the UK central bank and then expected one more quarter-point cut before the end of the year.
“It’s certainly going to be a finely balanced decision. You can see that from the market pricing,” said Jack Meaning, chief UK economist at Barclays. In the event of an unexpected rate cut, the Pound Sterling (GBP) might face some selling pressure, which acts as a tailwind for EUR/GBP.
On the other hand, a rise in Eurozone inflation on Wednesday raised questions about the number of rate reductions by the European Central Bank this year. However, Pictet Wealth Management economist, Frederik Ducrozet. said that hotter inflation data in July was “not much to worry about, but will keep the ECB on the cautious side." The ECB decided to cut its key lending rates in June, with another two reductions expected before the end of the year.
The first reading of the Harmonised Index of Consumer Prices (HICP) in the Eurozone climbed by 2.6% year-on-year in July, compared to 2.5% in June, exceeding expectations of 2.4%, Eurostat reported on Wednesday. Meanwhile, the core HICP inflation holds steady at 2.9% YoY in July and above the market consensus of 2.8%.
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
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