EUR/GBP hits fresh lows near 0.8630 after France’s debt downgrade
- The Euro gives away gains, hit by the downgrade of France's sovereign debt.
- On Friday, UK manufacturing production and GDP data raised concerns about an economic downturn.
- On Tuesday, UK Unemployment data might add pressure on the BoE to ease monetary policy further.
The Euro gave away gains from the previous two trading days on Monday, extending its reversal from Friday’s high above 0.8660 to a fresh two-week low at 0.8632, weighed by Fitch’s downgrade of France’s sovereign ratings.
The ratings agency announced over the weekend its decision to cut the ranking of France’s debt to A+, its lowest level on record, as the political crisis weakens the country’s ability to implement the necessary measures to avoid further escalation of its ballooning debt.
France is grappling with an unstable political situation, as President Macron just named Sebastien Lecornu, the third Prime Minister of his term. Lecornu replaces François Bayrou, who was toppled after a plan to reduce spending was refused by the parliament.
The pair, however, is failing to capitalise on the Euro downtrend, facing weaknesses of its own. The sharp contraction in July’s manufacturing production brought July’s GDP to stagnation levels.
The BoE is meeting on Thursday and is widely expected to leave its Repo Rate on hold at the current 4% but further evidence of an economic downturn –Unemployment levels are out on Tuesday– is likely to boost hopes of more rate cuts to come and might increase pressure on the Sterling.
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.
