Update, 02/11/17: The Bank of England has voted 7-2 in favour of hiking interest rates back to pre-referendum levels of 0.5%. However, the Pound has tumbled across the board as the meeting minutes and Inflation Report suggest that there are unlikely to be any further rate hikes.
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The Euro to Pound exchange rate is on strong form today as markets await the key monetary policy announcements from the Bank of England (BoE).
The EUR GBP exchange rate has climbed 0.5% to 0.8819.
German Unemployment Fall Boosts EUR GBP Exchange Rate
Today’s Eurozone data has largely proved positive, fuelling further advances for the Euro against the Pound.
Finalised Italian, French and German manufacturing PMIs from Markit have largely printed positively, with the Italian and German indices unexpectedly improving.
The overall Eurozone index has weakened against forecasts however, but the sector nonetheless remains firmly in positive territory.
Key German employment figures have marginally bettered forecasts after revealing that the number of people out of work declined by 11,000 in October, compared to the 10,000 drop expected by economists.
This was not enough to shift the unemployment rate down from 5.6%, but nonetheless points to the German economy moving in the right direction.
Detlef Scheele, Chief of the Labour Office, commented; ‘The positive development on the labor market persists. The strong upturn in the autumn has led to both unemployment and underemployment falling more strongly than usual.’
Cool Reaction to US FOMC Policy Communiqué Boosts Euro
The Euro has also been supported by a lukewarm market reaction to the latest US Federal Open Market Committee (FOMC) meeting statement.
Policy was left on hold and the FOMC took largely the same tone as in their previous statement, which somewhat disappointment markets looking for a clear indicator that rates would be hiked next month.
The odds on policy tightening remain enormous, however, but markets would nonetheless have liked a more telegraphed move.
This has kept the US Dollar on soft form, with investors having little incentive to alter their positions on USD, turning their attentions instead towards the Euro, amongst others.
Pound Slides as Markets Await Bank of England ‘Super Thursday’ Policy Announcements
A better-than-expected improvement in the Markit/CIPS UK construction PMI has failed to boost the Pound this morning, given the importance of upcoming events.
The index was expected to show a slowdown in contraction with a rise from 48.1 to 48.5, but instead climbed back into growth territory with a score of 50.8.
The Bank of England is soon to announce its latest monetary policy decisions and markets are on hold ahead of the statements.
Traders are firmly expecting the BoE to reveal a 0.25% hike to the benchmark rate, lifting borrowing costs from the 323-year low of 0.25% back to the pre-referendum levels of 0.5%.
With the likelihood of a raise seen as almost certain, markets will be looking further into the decision to glean more information on the outlook for UK monetary policy.
For instance, how many of the nine policymakers voted in favour of a rate hike will give a clue as to the odds of further rises in early 2018.
UOB Research explains;
‘We are looking for a 6-3 vote in favour for a hike, with Jon Cunliffe, Dave Ramsden and Silvana Tenreyo as the dissenters. Consensus forecasts are also for a 6-3 vote in favour for a hike. Hence, a 5-4 vote would be deemed as more dovish and could send the GBP lower to retest the 1.30-level, whilst a 7-2 vote could trigger a fresh rally, driving GBP back above 1.34.’
The BoE will also release the latest Inflation Report, which will provide further clues as to whether any rate hike delivered today is the first in a move towards higher interest rates or a one-off correction.