EUR/GBP jumps above 0.8350 after Bailey’s BoE speech

VaselineOctober 3, 2024

0 3 minutes read

EUR/GBP jumps above 0.8350 after Bailey’s BoE speech

EUR/GBP gains traction to around 0.8380 in the first European session on Thursday, up 0.65% on the day.
The BoE’s Bailey said the UK central bank could become slightly more aggressive on interest rate cuts.
Traders expect the ECB to cut interest rates in October.

The EUR/GBP cross is back near 0.8380 during Thursday’s European session. The pound sterling (GBP) loses ground after the speech of the Governor of the Bank of England (BoE), Andrew Bailey.

On Thursday, the BoE’s Bailey said the UK central bank could become somewhat “more aggressive” and “more activist” in cutting rates if there is further progress on inflation. Bailey also said he would closely monitor developments in the Middle East. Bailey’s dovish comments put some selling pressure on sterling and create a tailwind for EUR/GBP.

The BoE kept interest rates at 5.0% at the September meeting, following its first rate cut in four years in August. However, investors expect another cut of a quarter point at its meeting in November.

European Central Bank (ECB) President Christine Lagarde reiterated last month that the central bank was “not pre-committed” to further rate cuts, stressing that policymakers would remain “data dependent”. Recent economic data from the Eurozone earlier this week triggers the chance of an ECB interest rate cut. Eurozone inflation fell to 1.8% in September, below the 2% target.

Kazaks, a member of the ECB’s Governing Council, said that “recent data points clearly in the direction of tapering, but has tilted against the market’s ‘exaggerated’ expectations for easing.” Markets have priced in a nearly 95% chance of an October cut, compared to a 25% chance after the ECB’s September decision.

Investors await September’s HCOB Purchasing Managers’ Index (PMI) from Germany and the Eurozone, along with the Producer Price Index (PPI), due on Thursday. If the report shows a weaker-than-expected result, this could drag the common currency lower against the GBP.

Frequently Asked Questions for Pounds Sterling

The British pound (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded foreign exchange (FX) unit in the world, accounting for 12% of all trades, averaging $630 billion per day as of 2022. Its key trading pairs are GBP/USD, also known as “Cable”, which represents 11% of FX, GBP/JPY or “Dragon” as it is known to traders (3%), and EUR/GBP (2%). The pound sterling is issued by the Bank of England (BoE).

The most important factor influencing the value of the pound sterling is the monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its main objective of “price stability” – a steady inflation rate of around 2%. Its main tool to achieve this is the adjustment of interest rates. When inflation is too high, the BoE will try to control it by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low, it is a sign that economic growth is slowing. In this scenario, the BoE will consider cutting interest rates to reduce credit so that companies borrow more to invest in growth-generating projects.

Data releases measure the health of the economy and can affect the value of the pound. Indicators such as GDP, manufacturing and services PMI and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment, it may encourage the BoE to raise interest rates, which will directly strengthen the GBP. Otherwise, if the economic data is weak, the pound is likely to fall.

Another significant release of data for the pound is the trade balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports in a given period. If a country produces highly sought-after exports, its currency will only benefit from the additional demand created by foreign buyers looking to purchase these goods. Therefore, a positive net trade balance strengthens a currency and vice versa for a negative balance.

VaselineOctober 3, 2024

0 3 minutes read