0.8550: Euro tests one-week highs against British Pound amid ECB hawkish bets
The Euro (EUR) holds minor gains against the British Pound (GBP) for the third consecutive day on Monday, favoured by European Central Bank (ECB) - Bank of England (BoE) monetary policy divergence. Euro bulls, however, are struggling to find acceptance above 0.8550, with market volatility relatively low in a calm summer trading session.
The Euro is drawing some support from investors' growing confidence that the ECB is poised to hike interest rates after its September meeting.
Eurozone Gross Domestic Product (GDP) and Employment Change data seen last week endorsed this view. Economic growth bounced back in the second quarter after stagnating in the previous quarter, and employment grew, albeit at a moderate pace, allowing the ECB to hike interest rates by a quarter point in September to tame high inflationary pressures.
BoE dovishness, UK fiscal uncertainty keeps Pound's tone cautious
The case for the BoE, however, is less clear, with recent monetary policy decisions showing a split committee, while Governor Andrew Bailey's rhetoric leans towards the dovish side. UK GDP grew in Q2, but July's Industrial Production data hinted at an economic slowdown in the third quarter of the year, which, together with benign consumer inflation data in June, strengthens the case for a hold at next month's monetary policy meeting.
The political scenario is not encouraging for Pound bulls either. Rabobank analysts warn that “uncertainty about the budget could keep the UK market nervous into the autumn.”
Rabobank notes that while “the market may be more forgiving if the government is borrowing to invest, … extra gilt supply will still have to be absorbed, and infrastructure projects are likely to take years before they raise capacity.” The bank also stresses that, “either way, Burnham’s plans to ease the cost of living for the electorate still must be paid for,” underscoring the lingering concerns around how the UK’s looser fiscal stance will ultimately be financed.
Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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