EUR/GBP continues recovery triggered by Governor Bailey’s mischief

• EUR/GBP is up for a second day in a row after comments from BoE’s Bailey
• The BoE governor’s comments suggested that interest rates will continue to gradually decline as inflation eases.
• The euro remains under pressure due to weak data and growing bets on an October ECB interest rate cut.

EUR/GBP continues its recovery, trading up 0.40% to 0.8360 on Wednesday. The pound began to lose ground against the single currency after comments from Bank of England (BoE) Governor Andrew Bailey, in which he said he saw interest rates continuing to gradually decline. This in turn has put pressure on sterling as lower interest rates attract less capital inflows.

“I’m very encouraged that the path of inflation is down, so I think the path of interest rates will be gradually down to the ‘neutral’ rate,” Bailey said on Tuesday. The neutral interest rate is the long-run equilibrium or “ideal” level for interest rates in the economy.

His remarks come after a narrow five-to-four vote at the BoE’s August meeting backed a quarter-point cut by the bank, pushing borrowing costs to 5.00%. Meanwhile, financial markets fall to 4.5% by the end of 2024 and 3.5% by the end of 2025.

BoE policymaker Megan Greene was more bullish than Bailey on Wednesday when she said “a cautious, steady approach to easing monetary policy is appropriate”.

Greene added: “I think the risks to activity are on the upside, which could suggest that the longer-term neutral rate is higher and – all else being equal – our policy stance is not as restrictive as we thought. ” Greene was one of four MPC members who voted to keep rates in August.

EUR/GBP bounces back despite increasing odds of ECB autumn tapering

Euro rises against sterling despite rising rates The European Central Bank (ECB) will announce a 0.25% cut in its main refinancing operations rate in October, taking it to 3.40% from 3, 65%, thus widening the gap with the BoE.

“Despite the Fed’s 50bps cut, the ECB is expected to wait until December to deliver its next rate cut, although yesterday’s weak PMI readings as well as today’s Ifo pushed market prices closer to 50/ 50 for a rate cut already at the level of the next meeting in October,” said Anders Svendsen, Chief Analyst at Nordea Bank.

The euro fell sharply on Monday after the release of HCOB Purchasing Manager Index (PMI) data showed a sharp decline in activity in the eurozone economy, with the composite PMI falling from growth territory (above 50) to contraction (below 50).

This was followed by a below-expected IFO score for the German business sentiment index in September – the IFO is a survey of 7,000 businesses on the state of the economy and outlook.

Both the IFO index for business climate and current valuation fell below both previous readings for August and below economists’ forecasts. Meanwhile, the IFO expectations index matched forecasts but was still lower than the previous month’s reading. The data reinforces the view that the German economy is at risk of falling into recession.

Stronger sterling unlikely to react to lower inflation – Commerzbank

Speculation that a stronger pound – the major that has risen the most against the US dollar (GBP) since the start of 2024 – would lead to lower imported inflation and therefore lower UK inflation as a whole was rejected by Commerzbank currency analyst Michael Pfister. , Wednesday.

“In the UK, almost all of the inflationary pressure now comes from services. The role of goods is less important. In fact, in recent months we have even seen outright asset deflation in some areas, which has contributed to the decline in the base rate. The slight reversal that has occurred since then confirms our view,” Pfister said in a note.

If a stronger pound reduced inflation, it would encourage the BoE to cut interest rates more aggressively, ultimately weakening the pound and counterbalancing the strength that led to lower inflation in the first place.

However, Pfister sees little chance of this unless the GBP can rise substantially more for deflationary goods inflation to completely choke services inflation.

“Since the start of the year, the GBP has gained almost 5% against the USD. That makes it the best performing G10 coin by far, but it probably won’t be enough. GBP would probably have to appreciate much more for steady services inflation to narrow the gap between base rate and target,” the analyst said.