Weekly Eurozone – GBP under pressure because of dovish BoE

by: Georgette Boele

The sterling rallied versus the USD, but came under pressure versus the EUR. The most substantial part of rally of the GBP versus the USD was directly after the release of the weaker-than-expected US employment report. A day later the sterling gave up most of these gains. This also manifested itself in a higher EUR/GBP. The market has been disappointed that strong growth does not seem to urge the BoE to re-think its monetary policy. Indeed, the BoE minutes showed that officials voted unanimously to keep policy unchanged. Moreover, during the week, Charles Bean said that “there is still a long way to go before we can say the economy is mended. Until that is the case, monetary policy will need to remain supportive”. Comments from Mark Carney during the week also downplayed the strength of the economy. As a result, the market has scaled down some of its expectations of earlier rate hikes and this hurt the GBP. We have kept EUR/GBP forecast at 0.83, but changed GBP/USD to 1.63 for year-end to reflect our new USD forecasts.

 

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