EUR/GBP edges lower on Friday as traders sell the Euro (EUR) due to the increasing likelihood of the European Central Bank (ECB) making more aggressive interest rate cuts in the future. Lower interest rates are negative for a currency as they reduce foreign capital inflows. Recent price action has seen EUR/GBP steadily pull back almost three quarters of a pence from the October 3 high of 0.8434 to trade in the 0.8360s at the end of the trading week.
EUR/GBP meets pressure from sellers as traders gear up for another rate cut by the ECB at its October 17 meeting. Since the last meeting inflation has fallen more rapidly than previously expected – with the headline rate down to 1.8% in September, the first time it has fallen below the ECB’s 2.0% target in over three years. Growth too is slowing, suggesting the Governing Council will want to implement another 25 bps cut (0.25%) cut to its main refinancing operations rate (currently at 3.65%) in order to help lending to the economy.
“We expect the ECB to cut rates 25bp again on 17 October. Growth is even weaker than the ECB's downwardly revised September forecasts, inflation is coming back to target sooner than the end-25 staff forecast and there is little apparent opposition from the Governing Council to a further easing in October for risk management purposes,” said Mark Wall, Director at Deutsche Bank Securities.
Following on from the 25 bps cut made in the last meeting, another cut would be significant because it would “signal a pivot into a faster easing cycle,” added Wall.
Scandinavian lender Nordea Bank also sees the ECB cutting by 25 bps in October.
“The ECB is very likely to accelerate the pace of its rate cuts by cutting 25bp again at the October meeting. However, the central bank may not be ready to signal that it intends to cut rates at every meeting going forward,” says Jan von Gerich, Chief Analyst at Nordea.
The Pound Sterling (GBP), meanwhile, made mild gains on Friday after the release of broadly positive data. Gross Domestic Product (GDP) growth in August rose by 0.2%, in line with expectations and above the 0.0% of July. The led to a dip in EUR/GBP as Sterling saw some strength.
UK Industrial Production, meanwhile, rose 0.5% in August, which was above the (revised-up) 0.7% decline of July and the 0.2% rise expected. It was a similar story with Manufacturing Production which rose by 1.1% – higher than both the previous and expected figures.
The robust economic data indicates the UK economy is holding up well despite relatively high interest rates in the UK (5.0%). It suggests the Bank of England (BoE) will not be in a hurry to cut interest rates at the next meeting, giving the Pound an advantage over its peers which are mostly committed to cutting their borrowing costs.
The Pound sold off sharply on October 3 after the Governor of the BoE Andrew Bailey said the bank might get more “activist” and “aggressive” about cutting interest rates. The Sterling stabilized on the next day after BoE’s Chief Economist Huw Pill was more cautious in his comments. The BoE’s next policy meeting is on November 7 with a balanced chance of a 25 bps cut being made.
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