EUR/GBP rebounds and targets highs since May 2023, trading around 0.8810 during the Asian hours on Thursday. The currency cross gains ground ahead of German Industrial Production and Eurozone Retail Sales data for September due later in the day. Traders also await the Bank of England’s (BoE) interest rate decision for November.
Germany’s seasonally-adjusted Industrial Production is expected to increase 3% month-over-month in September, recovering the previous decline of 4.3%. The non-seasonally adjusted, working-day adjusted data showed a 3.9% year-over-year decline in August.
Eurozone Retail Sales are expected to rise 0.2% MoM in September, following August’s 0.1% increase. Meanwhile, the annual sales are anticipated to remain consistent at 1% growth.
The Euro (EU) receives support from market expectations that the European Central Bank (ECB) would likely adopt a cautious stance in its upcoming policy meeting. The ECB left its deposit rate unchanged at 2.0% for a third meeting last week. The central bank noted that the inflation outlook remains broadly stable, the economy continues to grow, and uncertainty persists.
The upside of the EUR/GBP pair could be limited as the Pound Sterling (GBP) receives support as the BoE is widely expected to keep its policy rate unchanged at 4% in November. However, softer inflation and wage data have strengthened the case for rate cuts in the coming months.
Chancellor Rachel Reeves is expected to introduce stricter fiscal measures in her November 26 budget to tackle the UK’s substantial borrowing requirements. Reeves hinted, in a pre-budget address, at raising taxes and underscored the importance of managing debt and borrowing expenses.
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.
