EUR/GBP dips as Pound shrugs off UK political noise, ECB and BoE meetings in focus
- EUR/GBP edges lower on Monday after brief volatility triggered by political jitters in the United Kingdom.
- UK PM Keir Starmer faces a parliamentary vote over a probe into Peter Mandelson's appointment.
- Focus shifts to ECB and BoE meetings, with rates seen on hold and attention on forward guidance.
EUR/GBP edges lower on Monday after brief volatility triggered by political jitters in the United Kingdom (UK). At the time of writing, the cross is trading around 0.8658, easing from an intraday high of 0.8676.
The British Pound (GBP) came under modest pressure before trimming losses following reports that UK Prime Minister Keir Starmer will face a parliamentary vote on a possible probe into whether he misled lawmakers over the appointment of Peter Mandelson as ambassador to the United States. The House of Commons is set to vote on Tuesday on whether to refer Starmer to the privileges committee.
EUR/GBP maintains a mild downside bias since the start of the month as traders reassess the monetary policy outlook amid rising inflation risks driven by higher Oil prices linked to the US-Iran war. While markets are increasingly pricing in the possibility of interest rate hikes from both the European Central Bank (ECB) and the Bank of England (BoE), recent UK economic data has tilted expectations more hawkishly toward the BoE.
As noted by MUFG’s Lee Hardman, "The pound has been supported by the hawkish repricing of BoE rate hike expectations encouraged by further evidence of stronger UK growth momentum at the start of this year while underlying inflation pressures remained uncomfortably high at the start of the energy price shock."
Attention now turns to upcoming monetary policy meetings due on Thursday. The BoE is widely expected to keep its policy rate at 3.75% for a third consecutive meeting, while the ECB is also expected to hold rates steady at 2.00% for a seventh straight meeting.
With the outcome largely priced in, the focus will shift to forward guidance as traders look for clearer signals on the interest rate path and whether recent hawkish expectations are justified.
According to a BHH report, the swaps curve suggests around 60 basis points of rate hikes from the ECB over the next 12 months. In comparison, the swaps curve points to roughly 75 basis points of tightening from the BoE over the same period.
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.