Fresh Guidance on BoE Rate Cuts Could Move the Pound
EUR/GBP recovered on Thursday despite comments by Bank of England’s Swati Dhingra, who said on Wednesday that delaying interest rate cuts could increase living costs and slow down economic growth. BoE Governor Andrew Bailey addressed the United Kingdom Parliament on Tuesday, noting the rapid decline in inflation in the UK and the bank’s willingness to cut rates before inflation reaches below the 2% target. BoE Deputy Governor Ben Broadbent noted that wage growth and services inflation remained above the rate, which indicate alignment with sustainable inflation at 2%.
The euro was under pressure as market was cautious following diminished expectations for early interest rate cuts globally. The seasonal and non-seasonal adjusted ECB Current Account was stronger in December compared to the previous month. Additionally, ECB Negotiated Wage Rates (QoQ) rose in the fourth quarter of 2023. ECB President Christine Lagarde has recently highlighted how wages remain an “important driver of inflation dynamics in the coming quarters.”
In terms of economic data, we note the following: On Monday, we get CBI distributive trades for February from the UK. On Tuesday, investors will turn their attention to Germany’s consumer confidence for March. On Wednesday we note the release of the Eurozone’s economic sentiment for February. On Thursday, we highlight GDP rates from France and preliminary HICP rates for February from France and Germany. On Friday, we get the release of the Eurozone’s preliminary HICP rates for February.
Expected Volatility – Medium
Investors will closely monitor any fresh commentary by BoE policymakers on rates cuts, and if they signal that they are nearing an easing in monetary policy, then the pound could weaken. For the euro, February’s preliminary HICP rate will be crucial. If the rate drops, market worries about inflation may ease, but this could weigh on the euro. A small increase may surprise markets and strengthen the euro, but it could boost concerns about an extension of tight monetary policy by the ECB.