EUR/GBP trades clam near 0.8640 in countdown to BoE-ECB policy
- EUR/GBP consolidates around 0.8640 as investors await the BoE-ECB policy meeting.
- Both the BoE and the ECB are anticipated to hold interest rates steady.
- Ahead of the BoE-ECB policy, investors will focus on the UK employment data.
The EUR/GBP pair trades in a tight range around 0.8640 during the Asian trade on Thursday. The pair consolidates as investors await monetary policy announcements by the Bank of England (BoE) and the European Central Bank (ECB) during the day.
Both the BoE and the ECB are expected to leave interest rates unchanged as the spike in oil prices amid Middle East conflicts has de-anchored consumer inflation expectations globally.
The BoE is anticipated to hold borrowing rates steady at 3.75%, with a 7-2 vote majority, and retain its “gradual monetary easing stance” as labor market conditions remain weak. This week, analysts at JP Morgan forecasted that the BoE could shift to an “extended pause” as inflationary pressures are unlikely to return to the central bank’s 2% target anytime soon amid the Iran conflict.
Ahead of the BoE’s monetary policy outcome, investors will focus on the United Kingdom (UK) labor market data for the three months ending in January, which will be published at 07:00 GMT. According to estimates, the ILO Unemployment Rate rose further to 5.3% from 5.2% in the quarter ending December, and Average Earnings Excluding Bonuses dropped to 4% Year-on-Year (YoY) from the previous reading of 4.2%.
In the ECB’s policy meeting, investors will focus on cues regarding whether the central bank intends to raise interest rates anytime this year. According to analysts at Commerzbank, traders are now fully pricing the first interest rate hike by September and only a 50% chance of another move by year-end. They also projected that ECB President Christine Lagarde could strike a relatively hawkish tone to anchor inflation expectations.
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
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
