GBP/EUR: Another BOE Policymaker Knocks the Pound

The British pound is lower against the euro on Monday after comments from a Bank of England policymaker added to evidence the central bank is leaning towards cutting interest rates in the UK this year. Meanwhile, the euro was gaining some traction in markets after a German central banker forecast faster growth in the Eurozone this year.

GBP/EUR was lower by 71 pips (-0.62% to 1.1665 as of 1pm GMT, taking the currency pair to its lowest since late December.

More broadly, expectations that the US and China will sign off on the first part of a trade deal is helping oil and stock markets move higher while gold prices fall.

The pound

The Bank of England’s Gertjan Vlieghe made his comments over the weekend and follow remarks along a similar vein from Mark Carney, the Governor of the Bank of England on Thursday last week. The speeches from the two central bankers seem to imply the Bank of England is moving off its neutral stance and preparing more monetary stimulus. This is perhaps not so surprising given the extra stimulus added in Europe and the United States last year. While some uncertainty has been reduced around Britain’s departure from the European Union after last month’s election, the future trading relationship is still up in the air.

The thought process at the Bank of England appears to be that monetary policy (including cutting interest rates and the purchase of government bonds) may need to be eased if a post-Brexit recovery never happens. Financial markets are now priced to indicate 50 basis points (0.5%) of interest rate cuts this year. That would leave the benchmark UK interest rate at a record low of 0%.

The release of disappointing UK industrial production for November added to bearish sentiment towards Sterling. A surprise contraction of -1.2% month-over-month against expectations of a  smaller -0.1% m/m decline deepened worry about the health of UK industrial productivity. Manufacturing production was disappointing too, dropping sharply by -1.7% m/m against expectations of a -0.3% drop.

The euro

The euro rose after an official from the German Bundesbank put Eurozone economic growth at 1.1% in 2020 in a talk given in Hong Kong on Monday. Burkhard Balz said that European economic growth would be supported by fiscal easing  this year and monetary easing which started at the end of last year.

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