EUR GBP Drops Ahead of Bank of England Rates

The EUR GBP exchange rate was lower ahead of the Bank of England’s key interest rate meeting. Markets are expecting a 0.15% rate hike as a minimum and there is sure to be volatility ahead. Elsewhere, UK services PMI and house prices showed an improvement.

The EUR v GBP is trading at 0.8480 and ECB Chief Christine Lagarde also took some wind out of the euro’s sail with dovish rate hike comments.

European central bank ‘very unlikely’ to raise rates in 2022

The European Central Bank is “very unlikely” to raise interest rates next year due to low inflation. ECB President Christine Lagarde said on Wednesday.

With inflation recently at a 13-year-high, markets have been betting that the ECB will have to retreat from its ultra-low monetary policy and raise rates next year for the first time in more than a decade.

“In our forward guidance on interest rates, we have clearly articulated the three conditions that need to be satisfied before rates will start to rise,” she said at an event in Lisbon.

“Despite the current inflation surge, the outlook for inflation over the medium term remains subdued, and thus these three conditions are very unlikely to be satisfied next year.”

Her comments have sunk into bond traders as bets in a 10-basis point increase were pushed out from next October to December 2022.

Today will see the Bank of England interest rate and there is potential for a 0.15% increase from the BoE. Anything less will hit the pound sterling, while a less aggressive outlook for future increases would also weigh on the pound.

For Lagarde, her comments fail to tackle the issue with Germany which has inflation at 4.5%. Other nations are seeing an increase well above the ECB 2% target, but the central bank remains fixated on the overall eurozone rate. A problem that occurs when a large number of countries with very different economies share one interest rate.

Bank of England should cheer services and house prices

The Bank of England will have made its mind up on today’s interest rate plans but the economy was boosted by a jump in the services sector and UK house prices, which topped 250k for the first time ever.

According to HIS Markit, the reopening of the economy and looser international travel restrictions helped to boost demand, with export sales rising at the fastest pace for more than three years.

The services PMI number came in at 59.1 in October, versus 55.4 in September, but respondents spoke of staffing problems and strong increases to input costs. Another reason why the BoE should make a move today.

Nationwide said its House Price Index showed the average price of a property in Britain now stood at £250,311. Prices rose another 0.7% in October, and 9.9% on an annual basis.

The EURGBP is positioned nicely ahead of the BoE rate meeting between resistance at 0.8500 and the yearly lows near 0.8400. A breakout here could be a medium-term move.

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