EUR/GBP softens to near 0.8300 as traders await Eurozone GDP data, BoE’s Bailey speech

EUR/GBP trades with mild losses around 0.8310 in Thursday’s early European session.
BoE Chief Economist Pill sounded cautious on rate cuts.
ECB’s Rehn said the December cut is likely with disinflation on track.

The EUR/GBP cross trades with mild negative bias near 0.8310 during the early European session on Thursday. The flash Eurozone Gross Domestic Product (GDP) number for the third quarter (Q3) will be released later on Thursday. The Bank of England (BoE) Governor Andrew Bailey and the European Central Bank (ECB) President Christine Lagarde are scheduled to speak later on the same day.

The UK Unemployment Rate rose more than expected to 4.3% for the three months ending in September, weighing on the Pound Sterling (GBP). ”The higher (UK) unemployment rate could see the market start to price in a higher chance of a rate cut from the Bank of England (BoE) next month," noted XTB analysts.

However, the Bank of England Chief Economist Pill remains cautious, saying that wage growth “remains quite sticky” at elevated levels and is “hard to reconcile with the UK inflation target.” Pill further stated, “We have seen a substantial disinflation in the UK economy, and that has allowed monetary policy restriction to be reduced.

The hawkish remarks from the BOE might cap the downside for the GBP for the time being. Traders await the speech from the BoE's Bailey on Thursday for some hints about the UK interest rate outlook.

The ECB policymaker Olli Rehn said on Tuesday that additional interest rate cuts are coming and the deposit rate could hit the so-called neutral level in the first half of next year. The expectation that the ECB is likely to deliver more rate cuts than the BoE might undermine the Euro (EUR) in the near term.

Markets have fully priced in a 25 basis points (bps) rate cut then, as well as a nearly 20% chance of a larger 50 bps move. Looking ahead, investors will keep an eye on the ECB's President Christine Lagarde’s speech on Thursday.

Central banks FAQs

What does a central bank do?

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

What does a central bank do when inflation undershoots or overshoots its projected target?

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

Who decides on monetary policy and interest rates?

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Is there a president or head of a central bank?

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

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