EUR/GBP Resilient Amidst BoE’s Interest Rate Speculation
- EUR/GBP is rising for the second day in a row after comments from BoE’s Bailey
- The BoE Governor’s comments suggested interest rates would continue falling gradually as inflation eased.
- The Euro remains under pressure by weak data and rising bets of the ECB cutting rates in October.
EUR/GBP continues its recovery, trading up 0.40% in the 0.8360s on Wednesday. The Pound started losing ground against the single currency after commentary from Bank of England (BoE) governor Andrew Bailey, in which he said that he saw interest rates continuing to fall gradually. This, in turn, put pressure on Sterling since lower interest rates attract less capital inflows.
BoE Governor’s Stance on Interest Rates
“I’m very encouraged that the path of inflation is downwards, therefore I do think the path for interest rates will be downwards, gradually, to the ‘neutral’ rate,” Bailey said on Tuesday. The neutral rate of interest is the long run equilibrium level, or “ideal” level for interest rates in the economy.
His remarks come after a close call five-to-four vote at the BoE’s August meeting backed up a quarter-point cut from the bank, pushing borrowing costs down to 5.00%. Financial markets, meanwhile, are pricing in a drop to 4.5% by the end of 2024, and lower to 3.5% by the end of 2025.
Diverging Views within BoE
BoE policymaker Megan Greene was more hawkish than Bailey on Wednesday when she said that a “cautious, steady-as-she-goes approach to monetary policy easing is appropriate.” Greene believes that the risks to activity are to the upside, suggesting that the long-run neutral rate might be higher than anticipated.
Greene was one of four on the MPC who voted to hold rates in August.
EUR/GBP Resilience Despite ECB Rate Cut Speculations
The Euro rallies against the Pound despite increasing odds the European Central Bank (ECB) will announce a 0.25% cut to its main refinancing operations rate in October, bringing it down to 3.40% from 3.65%, and thereby increasing the differential with the BoE.
Anders Svendsen, Chief Analyst at Nordea Bank, mentioned that market pricing is leaning towards a rate cut in October following weak PMI readings and Ifo German business sentiment data.
Concerns Over Eurozone Economy
The Euro faced pressure after the release of HCOB Purchasing Manager Index (PMI) data showing a decline in Eurozone activity. Additionally, below-expectations IFO German business sentiment data raised concerns about the German economy potentially entering a recession.
Impact of Stronger GBP on Inflation
Speculation that a stronger Pound would lead to lower imported inflation and decrease overall UK inflation were dismissed by Commerzbank’s FX Analyst Michael Pfister.
Pfister highlighted that most inflationary pressure in the UK comes from services, making the role of goods less significant. He also mentioned that unless the GBP appreciates substantially higher, it is unlikely to bring down inflation significantly.
Article Analysis
The article discusses the impact of central bank decisions on currency exchange rates, specifically focusing on the Euro and Pound. It highlights the diverging views within the Bank of England regarding interest rates, as well as speculations surrounding potential rate cuts by the ECB.
Furthermore, it addresses the implications of a stronger Pound on inflation in the UK and how it may not necessarily lead to lower inflation rates as initially speculated. The analysis provides valuable insights into the interconnectedness of economic factors and their effects on currency valuations.