Euro, British Pound Outlook May Hinge Upon the Bank of England's Meeting Next Week
Following Thursday’s smaller-than-expected rate cut by the European Central Bank, the euro ended Friday marginally higher against the US dollar, but down against the British pound. Indeed, EUR/GBP has continued to test rising trendline support that dates back to October 31, 2008, as well as the 100 SMA at 0.9028, and these levels denote a proverbial “line in the sand” for the pair, as a push below would indicate a bearish break. Whether EUR/GBP makes this break lower or manages to stage a recovery may depend upon next week’s key UK release, because for the first time since the summer of 2008, the Bank of England is expected to leave rates unchanged.
Indeed, both Credit Suisse overnight index swaps and a Bloomberg News poll of economists reflect forecasts that the BOE will leave the Bank Rate at an all-time low of 0.50 percent at 7:00 ET on Thursday. A look at their March 5 policy statement shows that the BOE’s Monetary Policy Committee (MPC) expects both growth and inflation to fall lower in coming months and also announced a new 75 billion pound asset purchase program, which included the buying of medium and long-term gilts. Ultimately, how the British pound responds will likely depend on two factors: whether or not the BOE asserts that they want to avoid cutting the Bank Rate to zero, and whether or not they indicate that they want to expand their quantitative easing (QE) efforts. Signs that the BOE is open to reducing rates further or signs that they will increase their gilt purchases could weigh heavily on the British pound, while the opposite (steady rates, no QE expansion) could provide a boost to the UK’s currency, especially against the euro. This is due to the fact that the ECB has left the door open to additional rate cuts, as well as their own quantitative easing efforts.
Related Article: ECB Cuts Rates By 25 bps, Less Than Expected
Check out the Daily Fundamentals in its entirety for a look at what happened throughout the FX markets today.