EUR/GBP Rises as Markets Wait for BoE Decision

Alan Penny

30 January 2020

3 min read

EU and UK flags - Brexit

  • Data indicates the possibility of a rate cut
  • German unemployment figures push euro up
  • Brexit day and the potential effect on the pound
  • Update: BoE holds rates steady

This morning, UK investors were clearly nervous about what the Bank of England would decide regarding interest rates. As a result, the EUR/GBP rose to trade at 0.848, equating to an increase of 0.3%.

Some experts felt the BoE was on a “knife-edge” regarding their decision. Neil Wilson, a analyst, stated there was a chance the BoE might decide to cut rates now.

He said, “Recent comments from several policymakers at the Bank, some softer inflation data and GDP numbers, and persistent risks to the global outlook suggest the MPC may choose to act now to cut.”

the EUR/GBP rose to trade at 0.848, equating to an increase of 0.3%

As the UK will officially leave the European Union tomorrow, there’s a chance a rate cut will happen. The UK’s departure from the EU means the country’s economic future is uncertain.

On the other hand, Britain’s economy experienced a fair amount of improvement after the election. Many firms have also begun investing once again. This might lead to the BoE deciding to keep the interest rate at its current level of 0.75%.

Others also felt this might be a possibility. Paul Hollingsworth, a BNP Paribas economist, felt that the policymakers will want “more hard data.” They’ll also want to “see the extent of any fiscal response in the March budget.”

Positive German unemployment data boosts euro

The EUR/GBP also rose on the back of positive German unemployment data. Thus, Germany’s unemployment change for January dropped to -2,000 from 8,000, beating forecasts.

Detlef Scheele, the head of the German Labor Office, had a positive outlook. He said the weakness in the German economy was still affecting the labor market. However, these figures are also an indicator of a positive start to the year.

Germany will be releasing its preliminary harmonized inflation figures for January later today. Analysts expect it to rise to 1.7% from 1.5%. If the figures meet or exceed expectations, the EUR/GBP could remain steady or even rise further.

Coronavirus outbreak helps the euro

Like the yen and the US dollar, many consider the euro a safe-haven currency. Therefore, the continuing concerns surrounding the Wuhan coronavirus outbreak are giving the euro a slight boost.

The latest official data shows that 7,711 people are infected in China. Currently, the outbreak has resulted in 170 fatalities. Hundreds of foreign citizens have been evacuated by their countries and are now in quarantine.

Markets aren’t certain what to expect. However, according to Reuters, the consensus is that China’s economy, the second-largest in the world, will take a hit. This could reverberate throughout the rest of the world, with possibly unforeseen consequences.

Potential effects of Brexit day on the pound

Tomorrow, January 31, marks the last day the United Kingdom will be part of the European Union. If there is even a suspicion the UK won’t get a good deal with the EU, the pound will suffer.

The Eurozone’s inflation number will also be published tomorrow. Analysts expect it to remain at the same level as last quarter, namely 0.2%. The figure is expected to slide to 1.2% from 1.3% last year.

Also, the UK GfK consumer confidence index is scheduled for release tomorrow. Experts predict the figure will remain at -9.

If inflation in the Eurozone meets expectations, the euro will likely continue to strengthen. This is especially true if UK consumer confidence stays subdued.

Even if consumer confidence in the UK does improve, it’s not a certainty that the pound will strengthen. Brexit day might concern investors far too much for them to have faith in the pound.

Update: BoE decides to hold rates steady

This afternoon, the GBP climbed slightly after the Bank of England decided not to change interest rates. The pound rose by 0.5%. Markets expect that a rate cut will come but towards the end of the year.

Written By
Alan Penny

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