EUR/GBP holds below 0.8750, all eyes on BoE rate decision
- EUR/GBP trades with mild losses around 0.8730 in Thursday’s early European session.
- German Industrial Production dropsped 1.9% MoM in June, weaker than expected.
- The BoE is expected to cut rates at its August meeting on Thursday.
The EUR/GBP cross trades on a negative note near 0.8730 during the early European session on Thursday. The Euro (EUR) remains weak against the Pound Sterling (GBP) after the German Industrial Production data. All eyes will be on the Bank of England (BoE) interest rate decision later on Thursday.
Data released by the Federal Statistics Office of Germany on Thursday showed that the country’s Industrial Production declined 1.9% MoM in June, compared to -0.1% (revised from 1.2%) in May. This figure came in below the market consensus of -0.5%. On an annual basis, German Industrial Production fell 3.6% in June versus -0.2% (revised from 1.0%) prior. The Euro remained unfazed in an immediate reaction to the downbeat German industrial Production data.
The European Union (EU) announced Monday that it will pause for six months its planned countermeasures against the US tariffs, which were set to take effect this week. However, the outcome of the EU and the US trade talks remains uncertain.
US President Donald Trump warned that a controversial investment pledge forming part of the EU-US trade deal will need to be honored by the EU, or 35% blanket tariffs will be applied to the bloc. Renewed trade tensions between the two countries could exert some selling pressure on the shared currency in the near term.
The BoE is expected to lower its base rate by 25 basis points (bps) to 4.00% at its August Monetary Policy Committee (MPC) meeting, which will be the third cut of 2025. Financial markets have priced in more than 80% odds of BoE rate cuts at the August meeting and are penciling in a further quarter-point reduction before the end of the year, according to Reuters.
Traders will closely monitor the BoE's Governor Andrew Bailey speech after the monetary policy meeting, as it might offer some hints about the UK interest rate outlook. Any dovish remarks from the BoE policymakers could weigh on the GBP and act as a tailwind for the cross.
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.