The euro to pound interbank exchange rate stands at 0.8591 today. This is its highest in close to three weeks, or since December 25th.

By comparison, back on January 1st, the Eurozone’s common currency was as weak as 0.8437 versus sterling, so it’s since strengthened by over 1.5 cents, or by 1.82%.

One partial explanation why the EUR to GBP interbank exchange rate continues to rise is because the Bank of England (BoE) is being increasingly tipped to cut UK interest rates in January.

According to markets, there’s now a 52% chance that the central bank will reduce UK borrowing costs below their current 0.75% to 0.5% this month, up from a 5% chance earlier.

In part, this is because a number of BoE policymakers have made comments, suggesting that they might vote to cut UK interest rates, if Britain’s economy doesn’t pick up soon.

Carney Says Weak UK Growth May Prompt “Relatively Prompt Response”

For example, speaking at a BoE Research Workshop last Thursday, BoE Governor Mark Carney said that, if UK GDP (Gross Domestic Product) doesn’t accelerate in early 2020, this could prompt a “relatively prompt response” from the central bank.

His BoE colleagues Silvana Tenreyro and Gertjan Vlieghe echoed his comments in the days after. Back in November, Michael Saunders and Jonathan Haskel already voted to cut UK interest rates.

So if Mr. Carney, Ms. Tenreyro and Mr. Vlieghe follow suit, this would make it five members of the nine-person BoE’s Monetary Policy Committee who intend to cut interest rates. In turn, this possibility has weakened sterling.

UK Economy Could Accelerate in Early 2020, Might Affect Sterling

However, it’s worth noting that, if the UK economy picks up in the meantime, the BoE might refrain from cutting interest rates.

For example, although we learnt yesterday that UK GDP fell by 0.3% in November, according to the Office for National Statistics, in the three months to November it rose by 0.1%. This was above economists’ predictions for a 0.1% fall.

Similarly, Deloitte’s CFO Survey for Q4 2019, between October and December, recently revealed "an unprecedented rise in business sentiment", following the UK election result. This suggests that the UK economy may soon grow faster.

For example, Stephen Gallo at BMO Capital Markets says that "weak economic data from the UK are 'old news' and we are in a 'new world'". So if UK GDP grows faster and the BoE stays its hand, this may affect the pound.

UK Inflation for December Forecast at 1.5%, Could Impact Pound

Looking to tomorrow, we’ll learn the UK’s inflation figures for last month. These are forecast at 1.5%, still below the BoE’s official target of 2.0%.

A result below 1.5% might further encourage the central bank to ease UK monetary policy, although a figure above 1.5% could prompt the BoE to pause for now. We’ll learn the result at 09.30 GMT, which might impact sterling too.

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Please bear in mind, this article is Pure FX’s opinion only and does not constitute advice. Moreover, the exchange rates referred to in this article are the interbank rates, which are the rates at which banks and financial institutions buy and sell currency to each other. Therefore these exchange rates cannot be accessed by individuals or SMEs, and are not the same rates that Pure FX can offer. To get a free exchange rate quote, call us on +44 (0) 1494 671800, or Contact Us.