Bank of England Interest Rate Decision Due Tomorrow

Pound to Euro Under Pressure as BoE Consider Stimulus

The GBP to EUR interbank exchange rate has fallen somewhat, in part because the financial markets are unsure if the Bank of England (BoE) will maintain or cut the UK’s interest rates from their current 0.75%, when the central bank convenes tomorrow at 12.00 GMT.

At present, the probability that the BoE will reduce UK borrowing costs stands at roughly 50%, having been as high as 72% last week, and as low as 5% at the start of this year.

In general, when the BoE cuts interest rates, this tends to weaken the value of sterling, although the pound traditionally rises when the central bank maintains or hikes borrowing costs.

This is because, when the BoE cuts interest rates, this reduces the cost of taking out a loan for British businesses and households, thereby supporting the economy, yet simultaneously making it less profitable to invest in GBP-denominated assets. We’ll see what the BoE decides, and sterling’s reaction, tomorrow at midday.

CBI’s Distributive Trade Survey for January Disappoints

Turning elsewhere, the sterling vs euro interbank exchange rate has also weakened since the start of this week, because yesterday’s CBI (Confederation of British Industry) Distributive Trade Survey results for January arrived below forecasts.

In particular, CBI’s survey, which measures activity in Britain’s vast services sector, came in flat at 0%, below economists’ forecasts for a +3% gain.

This contrasts to IHS Markit’s “flash” services PMI (Purchasing Managers’ Index) for January last week, which showed output in Britain’s largest industry rising in early 2020.

The CBI’s survey may cast doubt on whether the UK economy is accelerating this year, and hence whether the BoE will maintain or cut interest rates tomorrow.

Meanwhile, looking to the Eurozone, this Friday we’ll learn the bloc’s GDP (Gross Domestic Product) figures for Q4, between October and December, as well as last month’s inflation data, at 10.00 GMT. These too have the potential to affect the GBP to EUR interbank exchange rate.

If you have any GBP/EUR currency transfers to consider and wish to be kept up to date with all the events and news in the market ahead of this potential crucial time. Feel free to contact myself, Jonathan Watson, using the form below.