EUR/GBP hits fresh yearly lows below 0.8260 with the ECB on focus
- The Euro dives to fresh two-year lows below 0.8260 weighed by weak German data and a risk-averse sentiment
- German HICP contracted at a 0.7% pace in November, its worst reading Since December 2022.
- The diverging ECB and BoE monetary policy expectations are likely to keep the Euro under pressure.
The Euro resumed its broader bearish trend on Tuesday, breaking below November’s low at 0.8260 to reach its lowest prices in more than two years. A dismal risk mood and hopes of further ECB monetary easing this week are hammering the Euro across the board.
Earlier today, German CPI revealed that price inflation contracted 0.7% in November, highlighting the weak momentum of the Eurozone’s main economy and increasing pressure on the ECB to lower borrowing costs.
The bank is widely expected to cut rates by 25 basis points on Thursday. Investors, however, will be eager to know whether the weak economic outlook and the political uncertainty in Germany and France have altered the bank’s usual neutral forward guidance..
The UK, on the contrary, is showing a more resilient outlook, with the heavy-spending Labour budget expected to stir inflationary pressures. This will likely limit the BoE’s leeway to cut rates in 2025, which is giving a competitive advantage to the GBP.
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.
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.
