EUR/GBP holds steady as traders stay sidelined ahead of BoE and ECB meetings
- EUR/GBP stays range-bound as traders await Thursday’s policy decisions from the Bank of England and the European Central Bank.
- The BoE remains cautious after its recent rate cut, with UK inflation still running well above the 2% target.
- On the Euro side, the ECB’s steady policy stance and concerns over the recent strength of the Euro continue to shape near-term sentiment.
The Euro (EUR) remains range-bound against the British Pound (GBP) at the start of the week, as traders stay on the sidelines and avoid large directional bets ahead of this week’s interest-rate decisions from the Bank of England (BoE) and the European Central Bank (ECB). At the time of writing, EUR/GBP is trading around 0.8660, a little changed on the day.
The BoE and the ECB will announce their monetary policy decisions on Thursday, and investors broadly expect both central banks to maintain current interest rates.
At its last meeting, the BoE lowered the Bank Rate by 25 basis points (bps) to 3.75% and reiterated that the scale and timing of further easing would depend on how the inflation outlook evolves, noting that policy is likely to follow a gradual downward path, even as future decisions are becoming a "closer call".
The latest inflation data, however, continues to underline the BoE’s caution. Headline Consumer Price Index (CPI) rose 0.4% MoM, in line with expectations, after a 0.2% decline in November. On an annual basis, CPI accelerated to 3.4% from 3.2%, while core inflation held steady at 3.2%, leaving price pressure well above the central bank’s 2% target.
On the other side of the cross, the ECB left borrowing costs unchanged for a fourth consecutive time at its previous policy meeting, keeping the Deposit Facility, the Main Refinancing Operations and the Marginal Lending Facility rates at 2.00%, 2.15% and 2.40%, respectively.
The Governing Council reiterated its commitment to ensuring that inflation stabilises at its 2% target over the medium term and stressed that interest rate decisions would continue to be taken on a meeting-by-meeting basis.
However, the recent strength of the Euro against the US Dollar (USD) is increasingly seen as a downside risk to growth and inflation, and traders will be watching closely how the policymakers address currency developments in their policy message on Thursday.
On the data front, traders showed a muted reaction to the latest manufacturing Purchasing Managers Index (PMI) releases. In the UK, the S&P Global Manufacturing PMI rose to 51.8 in January from 51.6 previously, coming in above market expectations.
In the Eurozone, the Hamburg Commercial Bank HCOB Manufacturing PMI edged up to 49.5 in January from 49.4 previously, coming in above market expectations of 49.4, but remained in contraction territory.
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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