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Euro to The Pound Today Hits 2-Week High, on BoE Rate Cut Odds

Market CommentaryEuro to The Pound Today Hits 2-Week High, on BoE Rate Cut Odds
Euro to The Pound Today Hits 2-Week High, on BoE Rate Cut Odds

The euro to the pound interbank exchange rate stands at 0.8562 today. This is its highest in over 2 weeks, or since December 27th 2019. By comparison, back on January 1st 2020, the Eurozone’s common currency was as weak as 0.8437 versus sterling, so it’s since strengthened by over 1.25 cents, or by 1.48%.

One partial explanation why the EUR to GBP interbank exchange rate has risen is because markets are increasingly factoring in the possibility that the Bank of England (BoE) might soon cut UK interest rates, following a speech by Governor Mark Carney last week.

Speaking at a BoE Research Workshop, Mr. Carney said that, if the UK economy doesn’t accelerate in the next few months, this could encourage a “relatively prompt response” from the central bank.

This suggests that the UK’s central bank could cut interest rates below their current 0.75%, back to their all-time low of 0.5%. In theory, this would support the UK economy, by cutting the cost of a loan for households and businesses.

However, lower UK interest rates traditionally weaken sterling. Over the weekend, Mr. Carney’s remarks were echoed by his BoE colleague Gertjan Vlieghe, who said that he would “consider” voting to cut interest rates, if the UK economy remains slow.

Pound Weakens, as UK GDP Shrinks by 0.3% in November

In addition, another factor why the euro to the pound interbank exchange rate has strengthened is because, this morning, we’ve learnt that UK GDP (Gross Domestic Product) unexpectedly weakened by 0.3% in November.

According to the Office for National Statistics (ONS), the UK economy shrank over this month, well below economists’ predictions for a flat 0.0% expansion.

In part, this is because the UK economy continued to feel the effects of Brexit uncertainty in November. Also, this was before the Conservative Party’s election victory in December, which it’s thought has since increased business confidence.

This has weakened sterling, because when UK growth slows, this tends to mean there are fewer investment opportunities in the UK.

Euro Gains, as Eurozone PMI Improves in December

Elsewhere, the EUR to GBP interbank exchange rate has gained, because recently we’ve learnt that the Eurozone’s economy accelerated in November.

According to watchdog IHS Markit’s composite PMI (Purchasing Managers’ Index) for December last month, activity in the currency bloc rose to 50.9, above November’s 50.6. This suggests that services and manufacturing firms on the continent are producing more.

Looking ahead, it’s a packed week for economic data. This Wednesday 15th, we’ll learn the UK’s inflation figures for December, forecast at 1.5%, below the BoE’s 2.0% target. Then, on Thursday 16th, the European Central Bank’s latest meeting minutes are released.

Also, UK retail sales figures for December go public on Friday 17th, and are predicted to have risen by 0.8%, well above November’s 0.6% fall. All these releases could affect the EUR to GBP interbank exchange rate.

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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.

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