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EUR/GBP Continues the Decline, After the BOE Keeps the Policy on Hold

Posted Thursday, August 5, 2021 by
Skerdian Meta • 2 min read

EUR/GBP looking to break February lows

EUR/GBP has been bearish since the beginning of the year, with some help from the Brexit trade deal between the UK and the EU. This forex pair was trading above 0.92 back then, and now it is trading at lows of 0.85, only slightly higher than the lows in the first week of April. But, the lows and the highs are declining, so chances are that the EUR/GBP will break below the lows.

Today, the Bank of England remained mostly unchanged from the previous meeting, with only BOE member Saunders dissenting. The GBP didn’t tremble on this, and expectations are that the BOE will start making some hawkish comments as the economy improves and the country reopens. We have been selling this pair and will continue to do so during retraces higher.

EUR/GBP Live Chart

EUR/GBP

BOE August Monetary Policy Decision – 5 August 2021

BOE August bank rate 0.10%
Prior meeting bank rate was 0.10%
Bank rate vote 8-0-0, previous rate vote was 9-0-0

Gilts purchases £875 billion
Corporate bond purchases £20 billion
Total asset program £895 billion (unchanged)
Gilts purchases vote 7-1-0 (Saunders dissented), prior was 8-1-0

UK GDP expected to have risen by 5% in Q2
UK GDP expected to grow by around 3% in Q3
UK GDP will reach pre-pandemic levels in Q4 2021
Strength in global inflationary pressures expected to be transitory
Inflation projected to fall back to close to the 2% target
There is uncertainty about the impact of reducing the stock of purchased assets on monetary conditions
Judge it appropriate to begin reducing stock of purchased assets at a time when markets are functioning normally
Should economy evolve broadly in line with central projections, some modest tightening of monetary policy over the forecast period is likely to be necessary
When the bank rate has risen to 0.50%, and if appropriate given the economic circumstances, BOE intends to reduce stock of purchased assets
Some modest tightening of monetary policy is likely to be necessary, in order to be consistent with meeting inflation target in medium-term

There weren’t many changes, with the pound moving all over the place, to some extent, in reaction to the decision at thev meeting. Saunders was the sole dissenter against expectations of a 6-2 vote, but that isn’t quite the key highlight in my view. The BOE moved to reduce its policy rate threshold to unwind QE from 1.50% to 0.50%, and that arguably has stronger implications for future guidance.

It means that there is a lower threshold for the bank rate to explore, as a push to 0.50% will see quantitative tightening do some lifting in terms of overall policy tightening. Besides that, the central bank continues to brush aside inflation as ‘transitory’, but that was very much expected going into the meeting anyway, considering the economic circumstances.

The pound had a mini-whipsaw between 1.3905 to 1.3945, but it is currently settling around 1.3915, and on the balance of things, I think the lower threshold for unwinding QE, while seemingly hawkish, isn’t really that bullish for yields and the currency. In essence, the BOE will allow quantitative tightening to do more of the work, rather than relying on the bank rate. But at the end of the day, it also depends on the strength and nature of the recovery, so the two may also go hand-in-hand.

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