EUR/GBP slides further toward 0.8750 as traders pare back bets for BoE cuts
- The Sterling bounced up against the Euro after Thursday's BoE monetary policy decision.
- The split vote of the BoE's committee suggests that the Bank might be near its terminal rate.
- Weak German data highlights the weak momentum of the Eurozone's leading economy.
The Euro keeps heading south against the British Pound on Friday. The pair has lost nearly 90 pips since the Bank of England released its monetary policy decision, as price action approaches 0.8650 and is on track for a 0.8% weekly decline.
The BoE cut rates by 25 basis points to 4% as widely expected, but the dissenting opinion of four committee members, who voted to keep rates on hold, forced a second round of voting and prompted investors to scale back hopes of further monetary policy easing in the coming months.
The bank noted this year’s increase in inflation but considered that it would be a temporary trend. Price pressures have been mainly driven by energy and food, and might rise further in the next month, according to the statement. Policymakers, however, remain confident that the CPI will return to the 2% target in the longer run.
The Sterling appreciated across the board following the decision, and has kept trading higher on Friday, as the Euro loses ground against most of its peers. Recent Eurozone data has failed to provide any significant support to the common currency, as a larger-than-expected decline in German Industrial Production and the undershoot trade balance have reminded the soft momentum of the region’s leading economy.
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.
