EUR/GBP rebounds from seven-week low as BoE rate cut speculation rises
- EUR/GBP snaps three-day losing streak, the cross rebounds after hitting its lowest level since mid-June on Wednesday.
- The Euro finds modest support even as the US-EU trade deal clouds sentiment.
- German CPI rose 0.3% MoM in July, slightly above forecasts, while annual HICP slipped to 1.8%.
The EUR/GBP cross edges higher on Thursday, snapping a three-day losing streak and rebounding from the seven-week low hit on Wednesday. The recovery comes despite broader weakness in both the Euro and the British Pound against the US Dollar (USD), with the Euro gaining the upper hand as expectations grow that the Bank of England (BoE) will cut interest rates at its next policy meeting on August 7.
At the time of writing, the EUR/GBP cross is hovering around 0.8647 during the American trading hours, having erased all of its losses from the previous session. The pair is up roughly 0.35% on the day, as the British Pound is trading under pressure against its major peers, while the Euro finds modest support despite facing persistent drag from uncertainty surrounding the recently announced US-EU trade deal.
Earlier on Thursday, preliminary inflation data from Germany delivered a mixed signal for markets. According to Destatis, the Consumer Price Index (CPI) rose by 0.3% MoM in July, slightly above the 0.2% forecast and an improvement from June’s flat reading. On an annual basis, CPI held steady at 2.0%, in line with expectations. Meanwhile, the Harmonized Index of Consumer Prices (HICP) — the European Central Bank’s (ECB) preferred gauge — increased by 0.4% MoM, matching forecasts and accelerating from the 0.1% recorded in June. However, the annual HICP eased slightly to 1.8% from 1.9%, falling below both the ECB’s 2% target and market consensus.
Separately, Eurostat reported that the Eurozone Unemployment Rate edged down to 6.2% in June, better than the 6.3% expected. The prior month’s figure was also revised lower to 6.2%, highlighting continued resilience in the region’s labor market despite broader macroeconomic headwinds.
Expectations that the BoE will cut interest rates at the upcoming August 7 policy meeting have surged, with Market pricing now reflecting a high probability that the BoE will lower its benchmark rate from 4.25% to 4.00%, amid growing signs of economic weakness. Recent UK GDP figures showed back-to-back monthly contractions, fueling concerns over a potential recession. Additionally, softening labor market data — including falling payroll numbers, rising unemployment, and easing wage growth — have reinforced the view that the central bank may need to act sooner rather than later.
Looking ahead, market focus will shift to the Eurozone’s preliminary inflation data for July, due on Friday. A stronger-than-expected print may offer the Euro some support, while softer figures could reinforce a cautious European Central Bank (ECB) stance amid lingering growth concerns across the bloc.
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.