- The euro can be seen in front of the Libra, with the EUR/GBP keeping near the 0.8700 mark.
- The governor of the BOE, Bailey, points out that rates cuts remain probable, citing “economic slack and weakness in the labor market.
- The markets now discount a 90% probability of a BOE cut in August, with 75 basic flexibility points expected during the next year.
The Euro (EUR) can be seen in front of the sterling pound (GBP) on Monday, since the weak economic data of the United Kingdom and the moderate comments of the Bank of England (BOE) weigh strongly on the pound. Meanwhile, the euro remains stable despite latent commercial tensions between the European Union (EU) and the United States (USA).
The EUR/GBP crossing opened the week with a constant bullish bias, driven by the renewed weakness of the pound. At the time of writing, the pair is quoted around 0.8710 during the first hours of negotiation in America, keeping close to a maximum of two weeks.
The unexpected decrease in the Gross Domestic Product (GDP) of the United Kingdom for May, published on Friday, has intensified concerns about the country’s economic impulse. According to the Office of National Statistics (ONS), the economy contracted 0.1% in May, after a more pronounced contraction of 0.3% in April. The fall was driven by weakness in key sectors, including manufacturing, industrial production and construction, while only the services sector showed modest growth.
Adding bearish pressure on the pound, the governor of the Bank of England, Andrew Bailey, reiterated on Monday that interest rates are on a downward road. In an interview with The Times, Bailey said that the “economic slack” is beginning to emerge, particularly in response to the highest national employer insurance contributions, which he hopes will relieve inflationary pressures. He said: “I really believe that the road is down,” while pointing out that the rhythm of feat cuts would continue to be “gradual and careful.” However, Bailey also warned that if the slack opens faster than anticipated, the Central Bank could respond with a more decisive action.
Bailey comments align with a growing body of evidence that suggests that the United Kingdom labor market is beginning to lose impulse. A recent KPMG-REC Survey showed that the availability of personnel increased to the fastest rate since the end of 2020 in June, reflecting a strong deceleration in the contracting demand. Permanent employment vacancies fell to the most pronounced rate in two years, while official data showed that unemployment increased to 4.6% in the three months until April, a maximum of four years.
The combination of weak economic data of the United Kingdom, a labor market and increasing tax pressures is strengthening the case for a more aggressive flexibility cycle by the BOE. Market participants now assign approximately 90% probability to a rate cut at the August of BOE meeting, with increasing expectations for three cuts during the next year, totaling 75 basic points. Meanwhile, the ECB seems to be approaching at the end of its flexibility cycle as officials become more cautious amid persistent concerns about inflation. This divergent policy perspective could continue to support the euro in front of the pound.
Looking ahead, all eyes focus on the next inflation publications, with the United Kingdom Consumer Price Index (CPI) scheduled for Tuesday and the IPC of the Eurozone for Thursday. A weaker fact of the United Kingdom could consolidate the expectations of a rate cut in August by the BOE, while stable inflation in the Eurozone could reinforce the cautious posture of the ECB. This could keep the EUR/GBP with upward bias in the short term.
BOE – Frequently Questions
The Bank of England (BOE) decides the monetary policy of the United Kingdom. Its main objective is to achieve prices stability, that is, a constant inflation rate of 2%. Your instrument to achieve this is the adjustment of basic loan rates. The BOE sets the type to which it provides commercial banks and to which banks lend themselves to each other, determining the level of interest rates in the economy in general. This also influences the value of sterling pound (GBP).
When inflation exceeds the objective of the Bank of England, it responds by raising interest rates, which makes access to credit for citizens and companies more expensive. This is positive for sterling pound, since higher interest rates make the United Kingdom a more attractive place for world investors to invest their money. When inflation falls below the objective, it is a sign that economic growth is slowing down, and the Bank of England will consider the possibility of lowering interest rates to reduce credit in the hope that companies ask to borrow to invest in projects that generate growth, which is negative for sterling pound.
In extreme situations, the Bank of England can apply a policy called Quantitative Easing (QE). The QE is the process by which the BOE substantially increases the flow of credit in a stuck financial system. The QE is a policy of last resort when the descent of interest rates does not achieve the necessary result. The QE process implies that the Bank of England prints money to buy assets, normally state bonds or corporate bonds with AAA rating, banks and other financial institutions. Which usually translates into a weakening of the pound sterling.
The quantitative hardening (QT) is the reverse of the QE, and is applied when the economy is strengthening and inflation begins to rise. While in the QE the Bank of England (BOE) buys state and business bonds from financial institutions to encourage them to grant loans, in the QT the BOE stops buying more bonds and stops reinvesting the main one that expires of the bonds it already has. It is usually positive for sterling pound.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
