EUR/GBP gains traction to near 0.8350 ahead of BoE’s Greene speech
- EUR/GBP drifts higher to 0.8345 in Wednesday’s early European session.
- The BoE’s dovish stance continues to weigh on the Pound Sterling.
- The downbeat German IFO reports have added to German recession fears, which might cap the cross’s upside.
The EUR/GBP pair rebounds near 0.8345 during the early European session on Wednesday. The dovish remarks from Bank of England (BoE) Governor Andrew Bailey weigh on the Pound Sterling (GBP). Investors will take more cues from the BoE’s Megan Greene later in the day.
The BoE Governor Andrew Bailey said he was “very encouraged” by the downward path of inflation, and he expected the path for interest rates will be downwards gradually. However, Bailey warned consumers not to expect a return to near-zero levels. Bailey’s comments suggested that the UK central bank would continue its easing policy over a long period, which exerts some selling pressure on the GBP. The financial markets anticipate the interest rates could drop to 4.5% by the end of 2024, and lower to 3.5% by the end of 2025.
On the Euro front, Germany’s IFO Index dropped for the fifth consecutive month, indicating the economy remains stuck in stagnation. The German IFO Business Climate Index declined to 85.4 in September from 86.6 in August, below the consensus of 86.0. The Current Economic Assessment Index dropped to 84.4 versus 86.4 prior (revised from 86.5). Finally, the IFO Expectations Index declined to 86.3 in September from 86.8 in August, matching the expectations.
The fall in Germany’s IFO reports has added to German recession fears, which might cap the upside for the cross in the near term. On Tuesday, the ECB governing council member Klaas Knot stated that the central bank would continue to reduce the interest rates at least through the first half of 2025 to a level between 2% and 3%, per Reuters.
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.
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