EUR GBP Lower but a Base is Secured at 0.8500

The EURGBP exchange rate was lower on Monday, but recent price action looks to have secured a low around the 0.8500 level. The pound sterling had been strong recently on rate hike potential but that has settled. Risks are still present for both currencies, but the pound was driven forward on rate hike expectations and may consolidate.

The EUR to GBP rate trades at the 0.8545 level and would need to get back above 0.8475 to launch a recovery.

Bank of England governor still says the bank ‘will act’ on inflation

The Bank of England governor Andrew Bailey has said the bank ‘will act’ if higher inflation continues to add wage pressure.

Mr Bailey said that bottlenecks in the economy, especially in demand for labour, could fuel expectations of higher inflation. The governor added that the Bank of England lacked tools to control growing gas prices but was monitoring the spread of inflation.

“What we’re concerned about… is once you start to get an increase in inflation of this sort, we want to stop it becoming generalised in the economy. And that’s why we would, and will, have to act on interest rates if we see that evidence becoming clear.”

He added that any decision to change rates “doesn’t pass through” to the rest of the economy overnight and would need careful consideration.

Pound bulls are still reeling from the bank’s failure to act on interest rates last week which saw sterling unwind sharply.

Investment banks had predicted a November rate hike but those bets were pushed back as the bank held firm.

ZEW economic sentiment waits for the Eurozone

The economic calendar kicks off on Tuesday with ZEW economic sentiment for Europe and Germany.

Wednesday will be more important with the latest German inflation report and that should outweigh the Thursday update of UK GDP. The Bank of England downgraded their GDP forecast by 1% in last week’s economic forecasts and that is likely to keep negative reactions contained.

For the ZEW number, Germany has seen the sentiment of economists drop from 84.4 in May to an expectation of 20 tomorrow. Economists saw a peak in the economic rebound and that has continued with the ongoing effects of supply chain and labor shortages in Europe’s largest economy.

There was some cheer for the eurozone in investor morale from the Sentix index this week. Investor morale for the eurozone was higher in November for the first time since July as investors expected supply bottlenecks and higher prices to subside.

Sentix’s index for the euro zone rose to 18.3 from 16.9 in October. A Reuters poll had expected a reading of 15.5.

“Supply bottlenecks and high inflation are causing problems for companies and are having a certain braking effect,” said Sentix Managing Director Patrick Hussy.

“However, investors only expect a temporary burden and are therefore somewhat more confident about the next six months.”

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