Euro steadies against the British Pound following another rejection at the 0.8580 area
- EUR/GBP steadies above 0.8560 after being rejected at 0.8580 for the second time.
- A bearish engulfing candle in the daily chart suggests that Euro bulls might be giving up.
- German data was mixed on Friday: Industrial Production beat expectations, but the Trade Balance narrowed in June.
The Euro (EUR) trades practically flat against the British Pound (GBP) on Friday, moving in a tight range above 0.8560 during the early European session, following another rejection at the 0.8680 area. The daily chart, however, shows a bearish engulfing candle on Thursday, a bearish signal suggesting a deeper downside correction.
On the macroeconomic front, mixed German data has failed to provide any significant support to the pair on Friday. Industrial Production beat the market consensus, with a 0.2% gain in June, down from May's 0.7% increase, but above the 0.1% expected. German trade Balance, on the other hand, has shown a EUR 15.4 billion surplus in June, down from May’s upwardly revised EUR 19.4 billion, and below the EUR 17.4 billion surplus expected by the market.
Monetary policy divergence keeps weighing on the Pound
The UK calendar is thin on Friday, but the divergence between the European Central Bank (ECB), which has repeatedly hinted at an interest rate hike in the coming months, and a divided Bank of England's (BoE) monetary policy committee is keeping the Pound's recovery attempts limited so far.
FX Strategists at Rabobank argue that the recent shift in market expectations toward “steady policy from the BoE this year,” combined with the prospect of mounting “nervousness ahead of the October budget,” points to “scope for downside pressure on the pound as the summer draws to a close.”
In this context, the bank says it “favour[s] buying EUR/GBP on dips to the 0.8550 area,” adding that “a break above the recent high in the 0.8588 region could increase upside potential.”
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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