EUR/GBP rises as traders continue to digest Bailey’s comments

• EUR/GBP is up a third of a percent on Monday as traders continue to discount comments from the BoE’s Andrew Bailey.
• The bank’s governor said the BoE would become more “activist” in cutting interest rates.
• However, the upside for the pair is limited as euro zone data reflects a cooling economy.

EUR/GBP is trading hands in the 0.8390s after gaining more than a third of a percent on Monday, while the British pound (GBP) is resuming its downtrend of recent days, triggered by remarks from Bank of England (BoE) Governor Andrew Bailey. The pair’s gains are likely to be limited, however, by weak data from the euro zone on Monday, which showed consumers tightening their belts and German factory orders declining, which in turn undermined the euro (EUR).

The euro outperforms the pound on Monday as markets continue to digest comments from BoE Governor Bailey last Thursday, who said the BoE will become more “activist” and “aggressive” in cutting interest rates. His words surprised traders because until then the BoE was seen as one of the major central banks least likely to cut interest rates in the short term. Lower interest rates are negative for the pound as they reduce foreign capital inflows and as a result the pound lost over 1.0% against the euro on the day.

On Friday, BoE Chief Economist Huw Pill administered an antidote, arguing that the BoE should take a more cautious approach to cutting interest rates, and sterling recovered a bit. Upbeat house price data from lender Halifax further supported the pound on Monday, but not enough to catalyze a rally.

EUR/GBP, however, sees its gains capped as the euro struggles to gain traction following the release of weak eurozone retail sales data on Monday. The data showed sales rose just 0.80 percent annually in August, missing the 1.0 percent expected. However, this was larger than the 0.1% decline in July.

The single currency continues to be hampered by concerns about German manufacturing, and that was not helped by Monday’s German factory orders data, which showed a 5.8% drop on a seasonally adjusted basis in August. That was well below the expected 2.0 percent decline and the upwardly revised 3.9 percent increase from the previous month. The data add more credence to the view that the euro zone’s largest economy is slipping into recession.

Falling eurozone inflation data, which fell below the European Central Bank’s (ECB) target of 2.0% for the first time in more than three years in September when headline inflation hit 1.8%, is further weighing on the euro . This has increased the chances that the ECB will cut interest rates at next week’s meeting. Lower interest rates are usually negative for a currency because they reduce foreign capital inflows.

ECB Governing Council member François Villeroy de Galhau further fueled speculation on the matter overnight when he said it was “very likely” the ECB would cut interest rates at its next meeting. Villeroy added that the ECB must pay attention to the risk of overshooting its 2.0% inflation target “due to weak growth and a tight monetary policy for too long”. His comments “support the market pricing in a total of 150bp of easing over the next 12 months” from the ECB, according to analysts at Brown Brothers Harriman (BBH).