EUR/GBP trades sideways as investors await Eurozone CPI and German GDP

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EUR/GBP extends its range-bound trade on Monday, consolidating recent losses as repeated rejections near the multi-month resistance around 0.8750 continue to cap the upside.

EUR/GBP trades sideways below 0.8750 as investors await key Eurozone inflation data.
German IFO data beats estimates but fails to lift the Euro meaningfully.
Monetary policy divergence between the ECB and the BoE keeps EUR/GBP supported.

EUR/GBP extends its range-bound trade on Monday, consolidating recent losses as repeated rejections near the multi-month resistance around 0.8750 continue to cap the upside. At the time of writing, the cross is trading around 0.8736, with the British Pound (GBP) modestly outperforming the Euro (EUR).

Traders showed a muted reaction to the latest German IFO survey, as the data offered only limited support to the Euro. Germany’s IFO Business Climate Index rose to 88.6 in February, beating the 88.4 forecast and improving from 87.6 in January.

The IFO Current Assessment Index increased to 86.7, above expectations of 86.1 and up from the previous 85.7 reading. Meanwhile, the IFO Expectations Index came in at 90.5, in line with forecasts and higher than January’s 89.6.

Traders are refraining from taking aggressive directional bets ahead of key data releases scheduled for Tuesday, including Eurozone inflation figures and Germany’s fourth-quarter Gross Domestic Product (GDP).

Economists expect the Eurozone Core Harmonized Index of Consumer Prices (HICP) to ease to 2.2% YoY in January, down from 2.3% in December. The headline HICP is forecast to hold steady at 1.7% YoY.

Markets are also waiting for preliminary inflation data from Germany, France and Spain later this week. These figures are expected to provide more clarity on the inflation trend across the Eurozone and could influence expectations for the European Central Bank’s (ECB) monetary policy path, as markets widely expect the central bank to remain on hold throughout the year.

In the UK, expectations are growing that the Bank of England (BoE) could cut interest rates as early as March following softer inflation and weaker employment data released earlier this month.

The British Pound also faced pressure following dovish remarks from BoE policymaker Alan Taylor. Taylor said there are “two or three more cuts to go before reaching a neutral rate.” He added that weaker-than-expected productivity growth could pose a risk to the outlook.

The UK economic calendar is virtually empty this week, leaving EUR/GBP largely driven by Eurozone data and broader market sentiment.

BoE FAQs

What does the Bank of England do and how does it impact the Pound?

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).

How does the Bank of England’s monetary policy influence Sterling?

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.

What is Quantitative Easing (QE) and how does it affect the Pound?

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.

What is Quantitative tightening (QT) and how does it affect the 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.