EUR/GBP continues breaking lower after BoE leaves interest rate unchanged

EUR/GBP is trading lower in the 0.8390s on Thursday, as it extends its breakdown from the shallow channel it had been edging higher within since the end of August. 

The pair is trading a quarter of a percent lower on the day as the Pound Sterling (GBP) strengthens versus the Euro (EUR). The Pound is appreciating across the board after the Bank of England (BoE) voted by a majority of eight to one to keep interest rates unchanged at 5.00%. Only one member voted for a 0.25% cut. Sterling is seen gaining because relatively higher interest rates attract foreign investors, resulting in higher inflows of capital. 

The BoE also announced it would be reducing its stock of gilts (UK government bonds) by 100 billion GBP between October 2024 and September 2025. This suggests it will not be buying gilts to replenish its existing stock when they mature. This, in turn, is likely to lead to a fall in gilt prices but a rise in gilt yields. Higher yields tend to support the Pound, but weigh on EUR/GBP.

The Euro, meanwhile, is also finding support due to hawkish commentary from European Central Bank (ECB) executive board member Isabel Schnabel, who said that “sticky services inflation is keeping headline inflation at an elevated level.” Her comments suggest the ECB will not cut interest rates aggressively since inflation remains high. However, she also added that “medium-term inflation projections often clustered around the 2% target,” and that “wage growth is expected to slow down as past price shocks unwind.” 

Schnabel’s comments diverge from those of European Central Bank (ECB) Governing Council member and Bank of France President, François Villeroy de Galhau, who confirmed more cuts were on their way on Wednesday, saying that the “ECB is likely to continue to cut rates.”

Data showed the Eurozone registered a higher-than-expected Current Account surplus on Thursday. The Current Account in the Eurozone widened sharply to 48 billion EUR in July 2024 from 25.5 billion EUR a year earlier. A consistent surplus is a positive factor for a currency as it shows foreign demand for the currency to buy exports and services outweighs demand for foreign FX to buy imported goods and services. 

EUR/GBP fell on Wednesday after core UK inflation data came out higher, beating estimates whilst Eurozone inflation was revised down. Relatively higher inflation supported Sterling because it indicates interest rates will remain relatively higher for longer.

The core Consumer Price Index (CPI) in the UK rose above expectations, registering a 3.6% increase YoY in August. This was well above the 3.3% of July and the 3.5% expected. In addition, services inflation also rose. 

The Euro, meanwhile, experienced mild weakness after the Eurozone’s gauge of inflation, the Harmonized Index of Consumer Prices (HICP) was revised down to 0.1% MoM in August from a flash estimate of 0.2%, when no change was expected.