EUR/GBP drifts further, approaching 0.8700 amid a firm Pound
- The Euro approaches 0.8700 after peaking above 0.8740 last week.
- Strong UK macroeconomic data and dwindling hopes of BoR cuts are supporting the Pound.
- The impact of the upbeat German Ifo Business Climate Index on the pair has been minimal.
The Euro is pulling back from Friday’s gains, right above 0.8740, reaching session lows below 0.8720. The upbeat German Sentiment Index has failed to provide any significant support for the pair, as the Pound continues to draw support from the strong UK data released on Friday.
UK retail consumption figures beat expectations in September, with a 0.5% growth, following an upwardly revised 0.6% increase in August, against the market consensus, which had anticipated a 0.2% decline.
Strong UK data dampens hopes of BoE rate cuts
Beyond that, preliminary PMI services showed a substantial improvement in business activity. Services activity accelerated to 51.1. from 50.80 in September, beating expectations of a 51.0 reading, while the Manufacturing PMI jumped to 49.6 from 46.2 in September, reaching its highest reading in the last 12 months.
These data support the hawkish stance of the Bank of England and dampen hopes that the monetary policy committee might cut interest rates further, at least until the first quarter of 2026, which has provided a fresh boost to the GBP.
On Monday, the German Ifo Business Climate Index improved to 88.4 from last month's 87.7, beating expectations of an uptick to 87.8, which has provided some moderate impetus for the Euro. The Economic Expectations Index has jumped to its highest level in more than three years, at 91.6, although sentiment about current economic conditions has deteriorated to 85.5 from 85.7, limiting the positive impact on the Euro.
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.
Author
Guillermo Alcala
FXStreet
Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.
