The GBP to EUR exchange rate slumped late in the week after the Bank of England failed to raise interest rates despite recent comments. Traders had priced a 0.15% rise into the bond market and were punished by the BoE. The bank also failed to slow their bond buying. House prices and PMI services data were a boost for the pound sterling.
The GBP EUR entered the weekend below the 1.1700 level but comments from the ECB were also dovish.
Bank of England risks anger of the city as it fails to raise interest rates
The Bank of England risked the ire of some in the city after a failure to move on interest rates.
A small hike to 0.25% was baked into the gilt market and the bank even raised its inflation target to 5%. The BoE decided to use the recent market unwind as a soft hike as markets are still prepared for a rise, which ING analysts see in December.
“…the statement makes clear a December hike is more likely than not. More importantly, policymakers have offered very little pushback against market expectations for a series of rate rises next year. Nevertheless, we expect at most two rate rises in 2022.”
Elsewhere, UK house prices were strong despite the threat of a rate rise and the end of the stamp duty holiday. Mortgage lending for October was £9.5bn compared to expectations of £6bn. Nationwide also noted that prices had topped £250k for the first time ever.
Services PMI was also strong for the UK with the closely watched IHS Markit/CIPS UK Services PMI coming in at 59.1, up from 55.4 in September, which was the strongest growth since July. The UK appeared to have also found some common ground with France in the recent fishing spat. Despite these positives, the pound sterling versus the euro was still hammered lower by the BoE decision.
European PMIs sluggish, Lagarde ‘very unlikely’ to raise rates
PMI activity from the Eurozone was largely flat on Thursday with Germany and the Eurozone performing well in manufacturing but flagging in services. France and Italy were the opposite and overall figures were flat.
European Central Bank President Christine Lagarde was also dovish on rates in a Tuesday speech in Lisbon. Lagarde said: “In our forward guidance on interest rates, we have clearly articulated the three conditions that need to be satisfied before rates will start to rise. Despite the current inflation surge, the outlook for inflation over the medium term remains subdued, and thus these three conditions are very unlikely to be satisfied next year.”
But Lagarde is starting to take some flak from the German media with Bild, Europe’s highest circulating newspaper, saying: “Luxury-loving Lagarde makes savers and pensioners poorer”.
The comments are a little personal and based on the ECB Chief’s love of designer clothes and scarves. Germany has a negative attitude towards inflation and a recent print of 4.5% in the country will put pressure on the ECB if it continues to move higher.