EUR/GBP tumbles to near 0.8700 as traders await BoE rate decision

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The EUR/GBP cross loses momentum to near 0.8715, snapping the two-day winning streak during the early European trading hours on Monday. Investors will closely monitor the Bank of England (BoE) interest rate decision on Thursday.

EUR/GBP attracts some sellers to around 0.8715 in Monday’s early European session, down 0.10% on the day.
The markets expect the BoE to cut interest rates by 25 bps to 4.0% at the August meeting.
The preliminary Eurozone HICP data for July has diminished hopes of more interest rate cuts by the ECB.

Traders remain confident that the BoE will cut interest rates at its August meeting on Thursday after a slew of weaker UK economic data and signal a pause as price pressures remain well above the 2% target. The markets have priced in two further reductions, taking interest rates to 3.5% by the summer of next year. The more dovish remarks from the BoE officials could favor a depreciation in the Pound Sterling (GBP) against the shared currency in the near term.

On the Euro’s front, US President Donald Trump announced a 15% US tariff ceiling on most EU exports, including automobiles, semiconductors, consumer goods, and pharmaceuticals, averting previously threatened rates as high as 30% or more. This step is largely seen as a de-escalation measure after months of discussion and stress. Optimism surrounding US-EU trade deals could support the EUR, while any signs of renewed trade tensions could underpin the GBP.

A steady growth in the preliminary Eurozone Harmonized Index of Consumer Prices (HICP) data for July has diminished hopes of more interest rate cuts by the European Central Bank (ECB). This, in turn, might help limit the EUR’s losses. The data showed on Friday that both headline and core HICP rose steadily by 2.0% and 2.2% on year, respectively, slightly faster than their estimates.

(This story was corrected on August 4 at 06:45 GMT to say in the first paragraph that “The EUR/GBP cross loses momentum to near 0.8715, snapping the two-day winning streak during the early European trading hours on Monday”, not losing streak)

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.