EUR/GBP remains on the defensive near 0.8400, eyes on BoE rate decision

EUR/GBP loses momentum around 0.8405 in Thursday’s early European session.
The BoE is set to hold rates steady as it eyes stubborn inflation.
ECB’s Nagel said Eurozone inflation is not where the ECB wants it to be.

The EUR/GBP cross drifts lower to near 0.8405 during the early European trading hours on Thursday. The recent UK Consumer Price Index (CPI) inflation data released on Wednesday dampens hopes that the Bank of England (BoE) will cut interest rates on Thursday, which provides some support to the Pound Sterling (GBP). All eyes will be on the BoE monetary policy meeting on Thursday.

The BoE is anticipated to leave the interest rate unchanged at 5.0% at its September meeting as the UK CPI inflation remains above the central bank's 2% target. The UK CPI rose at an annual pace of 2.2% in August, in line with the market consensus and the previous reading of 2.2%. Meanwhile, core CPI, excluding volatile food and energy items, jumped 3.6% YoY in August versus 3.3% in July, hotter than the 3.5% expected.

Traders expect the BoE to delay a second rate cut until November. However, if the UK central bank surprises a rate cut, it might exert some selling pressure on the Pound Sterling (GBP) and act as a tailwind for EUR/GBP.

Inflation in the eurozone, as measured by the Harmonized Index of Consumer Prices (HICP), dropped to its lowest level in three years, easing to 2.2% YoY in August, but remains above the ECB’s goal. ECB policymaker Joachim Nagel on Wednesday noted, "This is because the monetary policy course must remain sufficiently tight for long enough for the inflation rate to return to the 2% target in the medium term.

BoE FAQs

What does the Bank of England do and how does it impact the Pound?

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).

How does the Bank of England’s monetary policy influence Sterling?

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.

What is Quantitative Easing (QE) and how does it affect the Pound?

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.

What is Quantitative tightening (QT) and how does it affect the 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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