EUR/GBP hits intra-day highs above 0.8680 after BoE Bailey’s testimony
- The Euro accelerates its uptrend following BuE Bailey's testimony on the Financial Stability Report.
- Bailey warned that the steeper yield curve reflects trade uncertainty, but he assured that this is a global trend.
- The Euro appreciates across the board after the release of the ECB's Lending Survey.
The Euro extends gains for the third consecutive day against a weaker British Pound, and nears intra-day highs at 0.8680 following BoE Bailey’s testimony on the Financial Stability report. From a longer perspective, the pair remains halfway through last week’s trading range.
BoE Governour Andrew Bailey observed the steeper yield curves on UK treasuries, but he said that this is a global phenomenon, reflecting the greater uncertainty on trade policy, and that the UK experience on yields is not out of line with other markets.
The British Pound has pulled back against its main peers following Bailey’s commentaries, also against a broadly stronger Euro, which is drawing support from a softer US Dollar and a rather upbeat ECB Lending Survey released earlier on the day.
The ECB Survey states that the conditions of credit have not suffered any significant impact due to the trade uncertainty, and mortgage and corporate credit demand increased in the second quarter and is expected to grow further in the next quarter.
These figures strengthen the case for steady interest rates after Thursday’s ECB monetary policy meeting and have given some support to the Euro, which is the best performer among the G8 currencies on Tuesday.
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.
