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Pound Euro Exchange Steady, as Market Weighs BoE Rate Cut

Market CommentaryPound Euro Exchange Steady, as Market Weighs BoE Rate Cut
Pound Euro Exchange Steady, as Market Weighs BoE Rate Cut

The pound to euro interbank exchange rate stands at 1.17 today. This is very close to yesterday’s 1.1712.

Sterling remains steady against the Eurozone’s common currency, in part because the financial markets continue to weigh up the possibility that the Bank of England (BoE) will cut UK interest rates later this month.

On the one hand, the case for the BoE to ease UK borrowing costs below their current 0.75%, back down to their all-time low of 0.5%, is mounting.

For example, yesterday we learnt that UK inflation fell to 1.3% in December, below both economists’ forecasts for 1.5%, and the lowest in three years. This is also further below the BoE’s official target of 2.0%.

When UK inflation eases, this tends to point to a sluggish economy, thereby encouraging the central bank to cut borrowing costs, to stimulate activity. With this in mind, Wednesday’s lower inflation contributes to the case for the BoE to cut, thereby weakening sterling.

BoE Considers Cutting Interest Rates, to Support UK Economy

In addition, since last Thursday, four members of the BoE’s nine-person Monetary Policy Committee have said that they might vote to cut UK interest rates, if the UK economy doesn’t pick up in early 2020.

For example, speaking at a BoE Research Workshop last week, Governor Mark Carney said that, if UK GDP (Gross Domestic Product) remains sluggish, this could trigger a “relatively prompt response” from the central bank.

Also, speaking yesterday, central bank policymaker Michael Saunders said that "it probably will be appropriate to maintain an expansionary monetary policy stance and possibly to cut rates further, in order to reduce risks of a sustained undershoot of the 2% inflation target."

So these remarks also increase the chance that the BoE will cut, when it next meets on January 30th, thus weighing down the GBP.

Central Bank Might Hold Interest Rates Steady, if UK Data Improves

That said though, if the UK economy improves in the coming weeks, this could convince the BoE to stay its hand at the end of this month.

For example, a recent Institute of Directors survey has found that, at the end of December, firms were their most confident about the outlook for the next year than any time since the survey started in January 2018.

In addition, Cathal Kennedy, European Economist at RBC Europe, says that "The results of the 'flash' PMI survey on January 24th are now probably the key data point between now and the MPC meeting on January 30th.”

So we’ll see if the UK economy improves in the next few weeks, and if this convinces the BoE to keep interest rates steady. This could affect the pound.

Turning to today, the European Central Bank (ECB) releases its Policy Meeting Accounts at 12.30 GMT. These have the potential to affect the euro, if they suggest that the ECB could ease monetary policy further later this year.

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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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