- EUR/GBP trades with a positive bias for the second straight day on Wednesday.
- The divergent BoE-ECB expectations continue to act as a tailwind for spot prices.
- Traders now await the US CPI report before positioning for further appreciation.
The EUR/GBP cross touched a one-month high, around the 0.8465-0.8470 region during the Asian session on Wednesday, though it lacks follow-through buying. The fundamental backdrop, however, suggests that the path of least resistance for spot prices is to the upside.
The British Pound (GBP) continues with its relative underperformance on the back of Tuesday's disappointing UK jobs data, which lifted bets that the Bank of England (BoE) will cut interest rates twice this year. In contrast, the European Central Bank (ECB) last week signaled that the end of the rate-cutting cycle is nearing. The divergent BoE-ECB expectations turn out to be a key factor acting as a tailwind for the EUR/GBP cross.
Adding to this, the previous day's breakout through a short-term trading range validates the near-term positive outlook and supports prospects for additional gains. Bullish traders, however, seem reluctant to place fresh bets and opt to wait for the release of the US consumer inflation figures, which might infuse volatility in the markets and provide a fresh impetus to the EUR/GBP cross later during the North American session.
In the absence of any relevant market-moving macroeconomic data, either from the Eurozone or the UK, the constructive setup might continue to act as a tailwind for spot prices. Hence, any corrective pullback could be seen as a buying opportunity and is more likely to remain cushioned.
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.
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