EUR/GBP remains capped below 0.8750 despite positive Eurozone data

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The Euro is picking up from six-week lows around 0.8725 on Monday, but remains capped below a previous support area at 0.8750 so far.

Euro recovery attempt against the Pound remains capped below 0.8750.
Upbeat German Industrial Production and Eurozone sentiment figures have failed to boost the Euro.
The Pound maintains a moderately bid tone with BoE speakers on tap.

The Euro is picking up from six-week lows around 0.8725 on Monday, but remains capped below a previous support area at 0.8750 so far. A mild improvement in Eurozone investors’ sentiment and the unexpected increase in German Industrial Production have failed to provide any significant support to the Euro.

The Eurozone Sentix Investors’ Sentiment Index picked up to -6.2 in December from -7.4 in November, according to figures released earlier on Monday. The Current Situation Index has risen to -16.5 from -17.5 in the previous month, while the Economic Expectations Index has shown the largest improvement to a reading of 4.8, from 3.3 in November.

Earlier in the day, data from Destatis revealed that German Industrial Production grew 1.8% in October, against the market consensus, which had anticipated a 0.4% contraction, and following a 1.1% rise in September.

Also on Monday, ECB Executive Board member Isabel Schnabel affirmed that she feels comfortable with investors' bets that the central bank's next move will be a rate hike, as, in her opinion, the economy “has been much more resilient than could have been expected.” Later on, ECB member and Bank of Finland Governor Olli Rehn took a more neutral stance, calling for a “meeting by meeting” approach.

In the UK, the calendar has been void during the London session, which keeps the GBP on a mildly positive trend against most of its peers. Investors' relief triggered by the UK’s tax-rising budget is still in play, ahead of the speeches of Bank of England officials Alan Taylor and Clare Lombardelli, due later on the day.

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.