Pound Sterling Drops Against Euro and Dollar on Bank of England Dovish Shift

March 21, 2024 - Written by John Cameron

STORY LINK Pound Sterling Drops Against Euro and Dollar on Bank of England Dovish Shift

The British Pound fell against the Euro, US Dollar and other major currencies on Thursday after the BoE kept rates and communication unchanged.

The Pound to Euro exchange rate (GBP/EUR) slipped 0.29% to trade at 1.16667. The Pound to Dollar exchange rate (GBP/USD) plunged near 1% to trend at around 1.2671.

However, the two remain hawkish members voted for a pause rather than a hike.

While the GBP declined against the majors, the FTSE jumped by +1.5%.

The BoE meeting on Thursday was the fourth central bank meeting this week in the G7. Volatility has been high since Wednesday’s FOMC meeting and this continued as the FTSE rallied +1.5% to trade at 10-month highs, while the Pound fell against the USD and the Euro. PMIs from the UK, EU and US complicated an already busy session.

The BoE kept rates on hold and communication unchanged. There was no press conference and no new projections, so the meeting seemed inconsequential to markets. However, some of the finer details ignited a large rally in the FTSE and a drop in the Pound which has taken EURGBP above 0.855 resistance to 0.857 with a 0.3% gain. Markets were quick to jump on the voting pattern of members and the fact that the 2 remaining hawks who have been voting for a further hawk are now voting to keep rates on hold. One member voted to cut rates at this meeting.

Shifting from a hiking stance to a hold doesn’t seem too dovish and it was only a matter of time before this happened. Indeed, there was scope for a more dovish message given the drop in inflation earlier this week and encouraging signs in the jobs market. However, that may have been counterproductive for the bank as it would have dropped the Pound further and encouraged markets to aggressively price in a June cut. There is plenty time for the bank to communicate a more dovish stance if data supports it.

“The Bank will have more clarity by June's meeting, and we think this is realistically the first ‘live’ meeting for a rate cut. We’ll be watching May’s policy statement for signs that the forward guidance is tweaked or watered down, which would be read by markets as a clear sign that rate cuts are imminent,” noted ING.

We may see markets price in June as a start point instead of August which would weigh on the Pound going forward. Now EURGBP has broken above 0.855, it could target 0.86 and perhaps try to break the stiff resistance at 0.87, although it would take a concerted dovish shift for this level to break and hold.

UK PMIs were released ahead of the BoE meeting and showed further improvement in the manufacturing sector as the index jumped from 47.5 to 49.9. This indicates neither contraction or expansion, and combined with services at 53.4, the UK economy looks on solid footing.

EU figures were more mixed. The composite figure rose again to 49.9, the highest reading since June last year. However, German figures weighed again, with manufacturing falling to 41.6, lower than the estimated 43.1 estimate. French readings also missed estimates.

PMIs data won’t have a large influence on central bank policy, but the German weakness and some encouraging signs in services encourage the view the ECB will be ready to cut in June. As ING noted,

“The rate outlook for the ECB hangs for a large part on how wage growth and services inflation develops. Services inflation has been rising month-on-month for a few months now and the PMI indicates that services cost pressures softened in March, while services output prices also moderated.”

The Euro is firm, and a June cut is now the base case. Indeed, 100bps of cuts are priced in this year and unless even more cuts are forecast, which seems unlikely, the Euro should remain stable. The Pound is more vulnerable as before this week’s meeting only 68bps of easing was priced in. Should this increase to 100bps, Sterling will be sold.

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TAGS: Pound Sterling Forecasts