EUR GBP Slumps with Bank of England Rate Talk

The EUR GBP exchange rate was lower on Monday after the Bank of England governor hinted at a rate hike sooner than expected due to inflationary pressures. Andrew Bailey’s pre-written comments would also not have accounted for fuel prices touching an eight-year high in the UK due to shortage fears.

The EUR to GBP rate trades at 0.8540 and could move back towards the key support at 0.8500.

Bank of England folds on rates due to inflation

Bank of England governor Andrew Bailey told the Society of Professional Economists on Monday that the MPC “believe that there will need to be some modest tightening of policy to be consistent with meeting the inflation target (of 2%) sustainably over the medium-term.”

The Governor said he was monitoring the situation, but he remains of the belief that many of the inflationary pressures are transitory. ECB President Christine Lagarde also used the transitory term over the weekend, but the recent price surges are a sign that central bankers are worried on prices.

Bailey said the economy was still in the recovery phase of the pandemic and there was still ‘hard yards’ ahead.

“I, and other MPC members, have also used the analogy of a bridge to describe the role of economic policy… the bridge to the other side of Covid-19. We are still on that bridge,” Bailey added.

His remarks were likely pre-written and don’t account for the fuel prices being at eight-year highs on Monday with the latest shortage worries.

German consumer confidence released, election still in balance

The latest German consumer confidence numbers are released on Tuesday with analysts forecasting a -1.6 reading from last month’s -1.2 reading.

Thursday will bring both UK and German data with a final reading for UK Q2 GDP data and German unemployment and inflation data. The unemployment rate is expected to dip to 5.4% from 5.5%, while the inflation rate is expected to move higher from last month’s 3.9% to 4.2%.

The Bank of England are on track to raise interest rates faster than the European Central Bank and that should support the pound sterling against the single currency.

The German election is still in the balance after the SPD party scored a narrow win over Angela Merkel’s CDU party. Merkel will stay on in a caretaker role until the successor is chosen but with the potential for a three-way coalition that could take months to decide.

Olaf Scholz is the SDP winning candidate and the 63-yr old is the outgoing finance minister and deputy chancellor to Angela Merkel. The process to secure his leadership could be lengthy, however. In 2017, although Ms Merkel won almost 33% of the seats, 13 points more than her nearest contender, it took around six months to build a coalition to secure her government and retain the position of Chancellor.

The euro versus the pound will not react until there is a firm leadership that outlines its spending plans.

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