EUR/GBP continues its recovery, trading up 0.40% in the 0.8360s on Wednesday. The Pound started losing ground against the single currency after commentary from (BoE) governor Andrew Bailey, in which that he saw interest rates continuing to fall gradually. This, in turn, put pressure on Sterling since lower interest rates attract less capital inflows. “I’m very encouraged that the path of inflation is downwards therefore I do think the path for interest rates will be downwards, gradually, to the ´neutral’ rate,” Bailey said on Tuesday. The neutral rate of interest is the long run equilibrium level, or “ideal” level for interest rates in the economy. His remarks come after a close call five-to-four vote at the BoE’s August meeting backed up a quarter point cut from the bank, pushing borrowing costs down to 5.00%. Financial markets, meanwhile, are pricing in a drop to 4.5% by the end of 2024, and lower to 3.5% by the end of 2025.BoE policymaker Megan Greene than Bailey on Wednesday when she said that a “cautious, steady-as-she-goes approach to monetary policy easing is appropriate.”Greene added “I believe the risks to activity are to the upside, which could suggest that the long-run neutral rate is higher and – all else equal – our stance of policy isn’t as restrictive as we had thought.” Greene was one of four on the MPC who voted to hold rates in August.EUR/GBP rebounds despite increasing odds of an ECB Autumn cutThe Euro rallies against the Pound despite increasing odds will announce a 0.25% cut to its main refinancing operations rate in October, bringing it down to 3.40% from 3.65%, and thereby increasing the differential with the BoE. “Despite the Fed’s 50 bps cut, the ECB is widely expected to wait until December to deliver its next rate cut, though yesterday’s weak PMI readings as well as today’s Ifo have pushed market pricing closer to a 50/50 for a rate cut already at the next meeting in October,” said Anders Svendsen, Chief Analyst at Nordea Bank. The Euro solf-off heavily on Monday after the release of HCOB Purchasing Manager Index (PMI) data showed a stark decline in activity in the Eurozone economy, with the Composite PMI falling from growth territory (above 50) to contraction (below 50). There then followed a below-expectations IFO German business sentiment index score in September – the IFO is a survey of 7,000 enterprises regarding the state of the economy and the outlook. Both the IFO Business Climate and Current Assessment indexes fell below both previous readings for August and economists’ forecasts. The IFO Expectations index, meanwhile, matched forecasts but was still lower than the previous month’s reading. The data reinforces the view that the German economy is at risk of falling into a recession. Stronger GBP unlikely to feedback into lower inflation – Commerzbank Speculation that the strengthening Pound – the major that has risen the most against the (GBP) since the beginning of 2024 – would lead to lower imported inflation and thereby bring down UK inflation as a whole, were dismissed by Commerzbank’s FX Analyst Michael Pfister, on Wednesday. “In the UK, almost all inflationary pressure now comes from services. The role of goods is less important. In fact, in recent months we have even seen outright goods deflation in some areas, which has helped to push down the core rate. The slight turnaround that has since taken place confirms our view,” in a note. If a stronger Pound were to bring inflation down it would encourage the BoE to cut interest rates more aggressively, eventually weakening Sterling and counterbalancing the strength that had led to the lower inflation in the first place. However, Pfister sees little chance of this unless GBP can rise substantially higher in order for deflationary goods inflation to completely smother services inflation.“Since the beginning of the year, the GBP has gained almost 5% against the USD. That makes it by far the best performing G10 currency, but it probably won’t be enough. GBP would probably need to appreciate much more for the persistently high services inflation to narrow the gap between the core rate and the target,” said the analyst. More By This Author:USD/JPY Price Forecast: Breaks Below Rising Channel, Weakening The Uptrend US Dollar Soft After Consumer Confidence Figures, Eyes On Fed Speakers US Dollar Sees Some Light Ahead Of The Weekend
EUR/GBP Continues Recovery Sparked By Governor Bailey’s Dovishness
