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Decreased Chance of BoE Cut Weighs on Euro Pound (EUR/GBP) Exchange Rate

Lower Chance of BoE Rate Cut Sends Euro Pound Sterling (EUR/GBP) Exchange Rate Lower

The Euro Pound Sterling (EUR/GBP) exchange rate slumped on Tuesday, leaving the pairing trading at around £0.8501.

At the end of 2019 after weakness within the labour market pushed two BoE policymakers to vote to cut rates.

Governor Mark Carney also said that further stimulus would be needed.

UK employment data from the Office for National Statistics (ONS) buoyed Sterling on Tuesday. It is likely this will ease the Bank of England’s (BoE) concerns about the extent of the labour market slowdown.

The ONS revealed that the number of employed Britons increased by 208,000. This was the highest increase since the quarter to January 2019.

This could undermine the bank’s case for a rate cut later this month, the chances of which increased yesterday.

Expectations for a rate cut fell from around two-thirds earlier in the day to 62%, boosting GBP.

Commenting on this, Kit Juckes, analyst at Societe Generale said:

‘If there’s a bias in the UK rates market, it’s for the pricing of a January cut to become a little less certain, while confidence increases that we will have seen one within a few months.

‘Sterling remains vulnerable in the short term, given the positioning.’

Euro (EUR) Falls despite Optimistic German Investors

The single currency slipped against the Pound on Tuesday despite data showing that German economic expectations increased.

This saw German investor morale rise to the highest level since 2015.

ZEW reported that economic expectations rose to 26.7 in January from 10.7 in the previous month.

The institute noted the improvement to investors in the bloc’s largest economy was largely due to the resolution of the trade dispute between the United States and China.

Commenting on this, ZEW President Achim Wambach noted:

‘This gives rise to the hope that the trade dispute’s negative effects on the German economy will be less pronounced than previously thought.

‘Although the outlook has improved, growth is still expected to remain below average.’

Euro Pound Outlook: Will a Dovish ECB Send EUR Lower?

Looking ahead to the end of the week, the Euro (EUR) could continue to suffer losses against Sterling (GBP) ahead of the European Central Bank (ECB) meeting.

Policymakers are expected to launch a rethink of the bank’s inflation goal which it has been unable to meet since 2013. Although, if the ECB is overly dovish, it will dampen single currency sentiment.

Meanwhile, Sterling could receive a further boost if data continues to undermine the Bank of England’s (BoE) case for an interest rate cut.

If the chance of a BoE rate cut continues to decrease, the Euro Pound (EUR/GBP) exchange rate is likely to slide further.