Euro jumps against British Pound as BoE leaves rates on hold

• EUR/GBP jumps above 0.8580, nearing two-month highs past 0.8600 as the Pound dives following BoE's decision.
• The BoE stands pat on rates, with three committee members calling for a quarter-point hike.
• Bailey hints at monetary tightening if the Middle East conflict persists.

The Euro (EUR) rallies on Thursday as the British Pound (GBP) dives across the board as the Bank of England (BoE) left interest rates unchanged, with most of the other major central banks tightening their monetary policies. The EUR/GBP pair appreciates more than 20 pips from daily lows, hitting session highs above 0.8580, drawing closer to two-month highs, just above 0.8600.

The BoE left its Bank Rate unchanged at 3.75%, with three committee members calling for a quarter point hike to 4%, the same voting split seen at the July meeting.

BoE Governor Andrew Bailey did not speak to the press after the decision, but the minutes of the meeting show a somewhat hawkish tone. Bailey acknowledged that the bank might have to tighten its monetary policy "if the Middle East conflict persists, as appears to be the case, and the risk of second-round effects emerging increases." These comments, however, have failed to provide any relevant support to the Pound.

Eurozone inflation has been revised lower

In the Eurozone, the final Harmonised Index of Consumer Prices (HICP) released earlier in the day confirmed that price pressures accelerated at a 0.4% pace in August from July’s 0.2% reading, while the year-over-year (Y-o-Y) record was revised down to a 3.2% growth from the 3.3% previous estimate.

Core inflation has been left unchanged at 0.2% monthly growth and a 2.4% Y-o-Y rise, which maintains the pressure on the European Central Bank (ECB) to keep tightening interest rates in order to tame consumer inflation.

Looking ahead, analysts at ING caution that the Bank of England’s dovish stance is likely to translate into renewed currency softness, stating that they “expect these dovish risks to feed into a weaker sterling against the Dollar and the Euro.” The “EUR/GBP remains our preferred way to play that GBP weakness beyond the near term,” says ING in a note, adding that the pair has a “target (of) 0.87 by year-end.”