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  • EUR/GBP dropped as low as 0.8750 in wake of a less dovish than expected BoE meeting on Thursday.
  • As a result, GBP is one of the G10 outperformers whilst the euro languishes.

In wake of Thursday less dovish than anticipated Bank of England monetary policy meeting and subsequent press conference, EUR/GBP took a beating, dropping from the 0.8830s to hit fresh multi-month lows at the 0.8750 mark, above which the currency pair is now stabilising. At present, EUR/GBP trades just under 0.7% or about 60 pips lower on the day.

Driving the day

Hawkish vibes from the BoE on NIRP, QE and the banks more optimistic forecasts for UK economy (more below) have lifted GBP to the top of the G10 performance table (GBP/USD is higher despite continued strengthening in the US dollar). Soft UK construction PMI numbers for January have been forgotten, and GBP also continues to benefit from the vaccine outperformance narrative (the UK continues to lead its developed-nation peers by a significant margin in terms of percentage of the population to have received their first Covid-19 vaccine).

Meanwhile, EUR is one of the G10 underperformers; technical selling in EUR/USD is worsening the single currency’s woes, with pair having dropped below the psychologically important 1.2000 level. Better than anticipated Eurozone retail sales numbers for December and indications that the candidate for the position of Italian Prime Minister (and former ECB President) Mario Draghi is going to be able to win a confidence vote have failed to turn the tide for the euro.

Bank of England Meeting Recap

As expected, the Bank of England’s Monetary Policy Committee (MPC) left interest rates unchanged at 0.1% and the bank’s Asset Purchase Facility at £895Bnin a unanimous vote. The bank reiterated that it will not tighten monetary policy until it is “achieving the 2% inflation target sustainability”. In what will come as a bit of a disappointment to some of the more dovish market participants, the bank said that negative interest rate policy (NIRP) is not yet operational and suggested that they will not be ready to implement NIRP for at least another six months.

Regarding negative rates, Governor Bailey was keen to impress in the press conference that just because the bank was going to include NIRP in its monetary policy toolbox that doesn’t mean the policy is definitely going to be used; “my message to the markets is do not read future MPC decisions based on toolbox moves” he said. Separately, BoE Deputy Governor Dave Ramsden said that the MPC will need to slow the pace of QE at some point and that the bank is on track to complete its QE programme by the year’s end; for reference, at the current rate of purchase (£4.4B per week) the bank will use up the remainder of the £150B it added back in November by mid-August. Thus, to extend purchases to the end of the year, a slowing weekly pace makes sense (in absence of a QE top up).

The bank’s new forecasts were also fairly upbeat; admittedly, the H1 2021 forecast was downgraded to take into account the stricter than anticipated lockdown the country is currently in. But the growth forecast for H2 2021 was upgraded and the BoE now thinks the UK economy will return to its pre-Covid-19 levels by the end of the year, versus previous forecasts for the economy to return to its pre-Covid-19 peak in Q1 2022. In the bank’s inflation forecast, inflation is expected to rise above 2% in the second half of 2022 and then stay above this level throughout 2023. This implies the bank is likely to be looking to hike rates in 2023.

EUR/GBP key levels