Euro stalls against British Pound as geopolitical uncertainty grips markets
- EUR/GBP recovery from 0.8542 lows halts at the 0.8570 area.
- Investors are looking from the sidelines, awaiting more certainty from the Middle East peace process.
- Experts at TD Securities expect Pound rallies to remain limited amid a dovish BoE.
The Euro (EUR) trades practically flat, a few pips below 0.8570 against the British Pound (GBP) on Tuesday, holding moderate gains after Monday's bounce from last week's lows at 0.8542. The lack of key releases in the Eurozone and the UK, and contradictory reports from the Middle East, are keeping investors cautious as they await further macroeconomic guidance later in the week.
Market sentiment is moderately positive as weapons in Iran remain silent for the second consecutive day, but reports from the conflict are contradictory. US President Donald Trump said that this is Tehran’s last chance to sign a good deal with the United States, but Iranian authorities have denied any talks with US negotiators. Beyond that, an organisation monitoring marine traffic in the Gulf has reported an attack on a cargo vessel earlier on Tuesday, adding strain to the peace process.
On the macroeconomic front, Eurozone and UK final Manufacturing PMI data was revised lower on Monday, with UK factory activity showing the largest correction. The calendar is practically void on Tuesday, and traders are likely to await Services PMI figures on Wednesday and Eurozone Retail Sales on Thursday, before placing large directional bets.
BoE monetary policy is seen weighing on the GBP
From a wider perspective, analysts at TD see the BoE monetary policy as a source of weakness for the Pound despite the hawkish 6-3 vote split at the latest BoE decision, as most policymakers maintain a cautious stance on interest rates
TD experts note that, “other than the vote split, it would appear to us the rest of the committee is still very comfortable keeping rates on hold, given the lack of clear second-round effects observed in inflation data.” In that context, TD sees the initial Pound reaction as overdone, stating that “we think the knee-jerk GBP rally should be faded vs the EUR and USD,” and warning that “further paring back of September BoE rate hike pricing could weigh on GBP.”
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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