- The Euro consolidates near multi-week highs.
- A string of weak UK data has undermined confidence in the Pound.
- UK CPI figures and the BoE decision might increase Pound’s weakness later this week.
Euro buyers appeared on Monday to keep downside attempts limited at the 0.8500 area and the EUR/GBP’s immediate bullish trend intact. The pair is extending gains on Tuesday and approaches six-week highs, at 0.8545.
The German ZEW Index, released earlier on Tuesday, revealed a larger-than-expected improvement in the economic sentiment in June, which provided moderate support to the Euro.
Institutional investors’ confidence in the German economy jumped to 47.5 in June, almost twice May’s 25.2 reading and well above the 35 market forecasts. The sentiment about the Eurozone economic outlook has improved to 35.3 from 11.6, also beating expectations of a 23.5 reading.
The Pound struggles ahead of the BoE decision
The Pound, on the other hand, remains on the defensive ahead of Thursday’s monetary policy decision by the Bank of England. The BoE is widely expected to keep rates on hold after the 25 bps cut approved in the last meeting, but might hint at further easing on the back of the weakening economic outlook.
UK data released last week showed that the economy contracted in April on the back of the US tariff turmoil, with industrial production declining beyond expectations and unemployment figures rising.
UK CPI data is out on Wednesday and will frame the BoE’s decision. Any hint towards further monetary easing is likely to highlight a monetary divergence with the ECB’s hawkish rhetoric and might give an additional boost to the Euro.
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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