EUR/GBP edges lower as UK GDP beats forecasts, Eurozone inflation in focus
- The EUR/GBP edges lower as Sterling draws support from steady UK GDP data.
- UK GDP grew 0.3% QoQ in Q2 as expected, while annual growth rose to 1.4%, beating forecasts.
- Market attention turns to upcoming Eurozone inflation data for policy signals.
The Euro (EUR) trades on the back foot against the British Pound (GBP) on Tuesday, with EUR/GBP hovering near the lower end of its week-long range, between 0.8720 and 0.8750. At the time of writing, the cross is trading around 0.8730, as Sterling draws support from steady UK growth data.
Data released by the Office for National Statistics (ONS) showed the UK economy expanded by 0.3% QoQ in the second quarter, matching both market expectations and the previous quarter’s pace.
On an annual basis, Gross Domestic Product (GDP) grew by 1.4%, in line with forecasts and up from 1.2% in Q1.
Across the channel, the latest national inflation reports presented a mixed but generally firmer picture, pointing to a slowdown in the recent disinflation trend.
In Germany, headline CPI accelerated to 2.4% YoY in September, beating the 2.3% forecast and up from 2.2% in August. Inflation in Spain also picked up modestly, while France’s annual rate inched higher but fell short of expectations. Italy’s inflation also ticked up slightly, highlighting persistent underlying price pressures across much of the bloc.
With the preliminary national inflation data out of the way, market attention now shifts to the Eurozone Harmonized Index of Consumer Prices (HICP) and the core measure for September, which will provide a clearer picture of underlying price pressures and guide expectations for the European Central Bank's (ECB) next monetary policy moves.
ECB President Christine Lagarde, speaking on Tuesday, said the central bank is “navigating a far more difficult environment than before, which we must also factor into our policy.” She emphasised that the ECB is “well placed to respond if the risks to inflation shift or if new shocks emerge that threaten our target,” and added that the risks to inflation appear “quite contained in both directions.”
On the UK side, Bank of England (BoE) policymakers offered a mixed but generally cautious tone.
BoE policymaker Catherine Mann said inflation remains “way above target” and stressed that the central bank must act more forcefully to anchor expectations if they drift away from the 2% goal. Meanwhile, BoE Deputy Governor Sarah Breeden said the underlying disinflationary process looks to be on track but warned that further increases in food prices could become a concern if they pushed expectations higher, even as she viewed the recent hump in inflation as unlikely to create lasting pressure.
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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