Thursday, 15 September 2016

GBP/EUR rates flat as BoE take no action

Today's Bank of England announcement was a bit of a non-event, and didn't affect exchange rates too much. All 9 members of the Monetary Policy Committee (MPC) voted to keep interest rates on hold, and not to increase the Quantitative Easing measures. This was pretty much what the market was expecting.

The Pound/Euro rate did almost reach €1.18 earlier today when Retail Sales figures were much better than expected but the rate fell back away again when it became clear that while the BoE didn't act today, it's very likely they will do so before the end of the year. They said that they were still very likely to cut interest rates again to just above 0%, and also said that the effect of 'Brexit' on the economy is less severe than they expected a month ago, when they cut interest rates at their last meeting.

What does this all mean for exchange rates?


Today just really underlines what we already knew; that Britain's economy is proving to be pretty resilient and robust, and is doing much better than everyone thought it would following the referendum. Recent figures show that wage growth is up, manufacturing and retail sales are strong, and overall economic activity is good. This is what has kept the Pound from falling any further in the last few weeks. However, it should also be noted that despite a more optimistic view from the BoE, they  have said that further measures will probably come at their next meeting in early November.

The uncertainty that surrounds what a post-Brexit UK will look like hasn't gone anywhere, and there is still no reason for the Pound to strengthen further. It all depends on the data over the next few weeks; if we continue to see decent figures, then expect the Pound to remain supported. It might then test the €1.20 level but I don't expect it to break through it. If the economy starts to show signs of the uncertainty creeping into economic activity, then Sterling may weaken.

Personally I think that because nobody really knows what it all means, everyone is just carrying on with things 'business as usual'. If the BoE do act in November and cracks start to appear in the economy, then the Pound will fall further. Bear in mind that it will be well into 2017 before article 50 is triggered and until then, uncertainty is likely to keep pressure on the Pound. Also, a former European Council president was in the news this morning saying that serious negotiations aren't going to happen until the end of next year, due to the fact that German elections are happening next September. Until the markets get a clear idea of what the future holds, the Pound is not likely to regain strength.

Of course events in Europe can also affect the GBPEUR rate. With the European Central Bank likely to also embark on further stimulus measures sooner or later, the Euro could weaken and become cheaper to buy.

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