Euro hovers near 17-month low against the British Pound as debt woes weigh
- EUR/GBP extends losses to the 0.8450 area, with the 17-month low ot 0.8447 a few pips away.
- France's debt issues and growing social unrest are keeping investors away from the Euro.
- In the UK, GDP data, due later this week, will be observed from a monetary policy perspective.
The Euro (EUR) depreciates further against the British Pound (GBP) on Monday after dropping about 1.7% over the previous two weeks, as ongoing concerns about France's fiscal health keep investors on their toes. The EUR/GBP pair trades just above 0.8450 after rejection at the 0.8490 area on Friday, with the 16-month low of 0.8447 just a few pips away.
Investors are staying away from the Euro as the spread between the 10-year French OAT yield and the safer German Bund escalates to 137 basis points, its highest level since the 2012 financial crisis. The political deadlock in France, ahead of the presidential elections next year, and the social unrest spreading through the country are a toxic cocktail for investors that has crushed the Euro over the last few weeks.
ECB's Lagarde and UK GDP are the highlights this week
In the Calendar on Monday, the focus will be on the European Central Bank (ECB) and Bank of England (BoE) speakers. Trading volumes, however, are likely to remain at low levels amid a long weekend in Japan and a partial holiday in the US.
In the Eurozone, on Wednesday, ECB President Christine Lagarde is expected to speak at a central bankers’ meeting in Bangkok, Thailand, and might provide some hints about the timing for the next interest rate hike.
In the UK, the highlight of the week will be August’s Gross Domestic Product (GDP) and Industrial and Manufacturing Production figures, due on Thursday. These numbers might attract particular interest this week, with investors looking for confirmation of the hawkish comments by BoE policymakers, including Governor Andrew Bailey in previous weeks.
Analysts at Commerzbank argue that the UK’s “improved growth outlook should make it easier for the Bank of England to raise rates further in order to lean against inflation.” Regarding the EUR/GBP's near-term outlook, Commerzbank points out that they expect "EUR/GBP to trade broadly sideways over the coming months.”
Central banks FAQs
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%.
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.
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%.
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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