Euro to Pound X-Rate Breaking Higher, £0.92 Possible
- Written by: Gary Howes
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- Quotes:
- Pound to Euro exchange rate today: 1.1060, low: 1.1058, best: 1.1199
- Euro to Pound Sterling exchange rate today: 0.9040, low: 0.8925, best: 0.9042
The Euro has rushed through a key level against the British Pound on Thursday, August 3 with analysts saying further gains are likely near-term.
EUR/GBP broke the £0.90 ‘handle’ on a broad-based sell-off in Sterling as the Bank of England opted to keep interest rates unchanged and downgraded economic forecasts in its latest inflation report.
Importantly the Bank’s Monetary Policy Committee voted 6-2 to keep interest rates unchanged and it’s quite obvious markets were looking for a 5-3 vote which would have been suggestive that maybe an interest rate rise was in fact likely in the future.
“Sterling plunged by over a cent against the Dollar and was trading at 90 pence against the Euro after the Bank of England delivered a mixed set of signals to the market,” notes Neil Wilson, an analyst with ETX Capital.
“Votes are discrete events though so it’s not worth reading too much into this, particularly as we’d expected the loss of Kristin Forbes to mean fewer hawks,” suggests Wilson.
Nevertheless, GBP/USD retreated to 1.3145 having traded as high as 1.3268 after the slight improvement in the July services PMI.
The Euro rallied against Sterling to touch the £0.90 handle for the first time since November.
Concerning the immediate outlook, analyst Robin Wilkin at Lloyds Bank Commercial Banking reckons “the probabilities are more aligned for a test up towards the 0.9170-0.9200 key resistance region.”
As can be seen in the below charts, the long-term trend remains higher with the Euro having been untroubled since March and a broader uplift being in place since 2015.
Who would argue against such a trend? We are a long way from seeing any kind of meaningful reversal so brace for an even weaker Pound.
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Traders Ignore Warning of Future Rate Rises
Of note was the Bank’s mention that it might be underestimating how far it needs to raise its benchmark rate over the forecast period.
The MPC reckons on two hikes over the next three years, with the first coming in Q3 2018.
“All else being equal this ought to be supportive of Sterling,” says Wilson. “So a dovish vote but a slight tightening bias is being displayed.”
But, markets are clearly not buying this point on the prospect of interest rates in the future, this is simply an institution that has a heavy bias against such a move:
“This is fairly non-committal language and didn’t convince the FX market that the BOE is serious about hiking, especially since the hawkish contingent lost one of its members at this meeting – Kirsten Forbes left in June and her replacement, Silvana Tenreyo, didn’t follow her footsteps instead choosing to vote with the pack. In fairness, the BOE can hardly hike rates any time soon when it has just cut this year’s growth forecast to 1.7% from 1.9%, and 2018 GDP has been lowered also,” says Kathleen Brooks at City Index.
Indeed, the Bank is less upbeat on growth, saying it will remain “sluggish in the near term as the squeeze on households’ real incomes continues to weigh on consumption”.
Regarding inflation, the latest fall in the inflation rate is expected to be reversed with the MPC expecting inflation to peak at around 3% in October before falling back to average 2.7% this year and 2.6% in 2018.