The GBPEUR exchange rate slumped on Thursday after the Bank of England announced a reduction in its bond buying programme. This was driven by an expected hike to their growth forecast for the UK economy, but the bank signalled that rates would not rise until 2023.
The GBP to EUR bounced off the 1.15 level on and will now look to test the support here.
Bank of England reduces bond buying as expected
As noted in our blogs this week, the Bank of England was always going to keep rates at 0.10% as they attempt to convince the market that inflation is “transitory” and that no rate rise will come before 2023.
We also shared research from ING bank which predicted that the bank would reduce its bond buying and still stay within its yearly target. This was the headline of the meeting with a cut in bond purchases from £4.4bn to £3.4bn.
The BoE said that the move to reduce its weekly purchases should “not be interpreted as a change in the stance of monetary policy”. Central banks are fretting that markets will move too soon to price in rate rises ahead of their schedule and the BoE made another attempt to talk down inflationary expectations.
“Inflation is projected to rise close to the target in the near term as some of those effects fade. In the central projection, CPI inflation rises temporarily above the 2% target towards the end of 2021, owing mainly to developments in energy prices. These transitory developments should have few direct implications for inflation over the medium term, however,” the official statement said.
The bank also said that their 2% target for inflation would remain for the medium term and the GBPEUR rate has maybe overreacted to the news. The BoE’s moves on Thursday were fairly predictable as they telegraphed many times that they will stick to the rate rise timeline.
Growth forecasts for the UK were upped to 7.25% and the country is now expected to see its pre-virus levels in 2021, three months ahead of the bank’s previous expectations.
Euro trade and British construction updates
This morning sees the latest trade balance figures for the German and French economies, and this will be followed by retail sales from the Italian economy, which will look to follow up on last month’s 6.6% bounce. The UK will also see the latest construction PMIs with a reading of 62.3 expected after a strong showing last month at 61.7. The construction sector was able to escape much of the downturn with sites reopened ahead of the services sector.
ECB President Christine Lagarde will speak later today, but the European Central Bank updated markets recently and they are trying to remain tight-lipped on the outlook for inflation or tapering. Lagarde has recently said the Eurozone economy is on crutches and needs support for a while yet.
The GBPEUR has support at the 1.1475 figure and a move through there would look to target the 1.1280 level.