EUR/GBP supported by dovish BoE tone and persistent UK fiscal headwinds
- EUR/GBP trimms earlier losses as the Pound struggles amid ongoing UK fiscal uncertainty.
- BoE’s Ramsden expects wage and service price pressure to continue easing, leaving room for further monetary policy easing.
- Traders await the Eurozone flash inflation readings and UK final Q2 GDP for fresh policy clues.
The Euro strengthens against the British Pound on Monday, with EUR/GBP recovering to around 0.8742 at the time of writing after briefly dipping to a one-week low earlier in the day. The cross gained traction as the Pound remains pressured by ongoing UK fiscal worries, while slightly dovish remarks from Bank of England (BoE) Deputy Governor Dave Ramsden added to the drag on Sterling.
BoE Deputy Governor Dave Ramsden said on a panel at a European Central Bank conference on Monday that there is “scope for further removal of policy restraint,” while emphasising that a “gradual and careful approach on rates is appropriate.” Ramsden noted that the UK labour market “continues to loosen, with wage growth normalising” and that “wage settlements are now broadly in line with pay surveys.”
He added that while headline inflation is likely to “rise slightly further before peaking,” he is “confident we’ll get inflation back to target” and sees the risks to the outlook as “balanced.”
UK fiscal policy remained a headwind for Sterling. Earlier on Monday, Chancellor Rachel Reeves reiterated her commitment not to raise VAT, income tax, or National Insurance during the current Parliament in an effort to reassure households and businesses amid growing speculation over potential tax hikes.
She nevertheless refused to rule out other revenue-raising measures, stressing the need for “economic discipline” as the government grapples with elevated borrowing costs and persistent budget pressures.
On the Euro side, sentiment data released earlier on Monday painted a mixed but steady picture. The European Commission’s Business Climate Index slipped to -0.76 in September from -0.72 in August. Consumer Confidence remained unchanged at -14.9, in line with forecasts, while the Economic Sentiment Indicator edged up to 95.5 from an upwardly revised 95.3 in August.
Looking ahead, the focus will shift to the flash September inflation data in the Eurozone, with national readings from Germany, France and Italy due on Tuesday and the bloc-wide figure on Wednesday. Spain’s preliminary data, released earlier on Monday, showed annual inflation rising from August but coming in slightly below expectations, while monthly prices declined.
In the UK, attention will also turn to the final second-quarter Gross Domestic Product (GDP) data due 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
Vishal Chaturvedi
FXStreet
I am a macro-focused research analyst with over four years of experience covering forex and commodities market. I enjoy breaking down complex economic trends and turning them into clear, actionable insights that help traders stay ahead of the curve.
