LIVE MARKETS-BoE, ECB set pound and euro on divergent paths

Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at markets.research@thomsonreuters.com

BOE, ECB SET POUND AND EURO ON DIVERGENT PATHS

On the surface, the decisions by both the ECB and BoE to hold rates yesterday may look similar, but the commentary surrounding the announcements was very different.

The BoE voted by 5 to 4 to keep rates unchanged, but said borrowing costs were likely to fall further if an expected drop in inflation is sustained.

And while the ECB also kept rates on hold, their inflation outlook was largely unchanged, suggesting they will keep policy steady for months to come.

"[Thursday's] BoE meeting implies further downside risks to Bank Rate in our view, with a dovish vote split versus what was expected," Nomura's head of G10 FX strategy Dominic Bunning said in a note.

"We also see increasing risks that the next move from the ECB could be a hike rather than a cut, as is priced in, albeit in the distant future."

The two policy announcements are part of why Bunning has raised the conviction on his long EUR/GBP recommendation.

The other reason is the heightened political uncertainty in Britain, with PM Keir Starmer under pressure over the appointment of Peter Mandelson as the British Ambassador to the United States.

"In our view, there are few, if any, potential candidates to replace Starmer, who would be deemed more market-friendly, as his bias is firmly towards the centre rather than the left of the party," Bunning said.

"A new PM would be likely to appoint a new Chancellor, creating the risk of negative fiscal sentiment returning."

Bunning is targeting a rise in EUR/GBP EURGBP= to 0.8950. The currency cross was last at 0.8686. Two-year gilt yields GB2YT=RR, which are more sensitive to expectations for BoE monetary policy, staged their largest one-day drop since November, as prices rallied, after the decision on Thursday. They are set for a weekly decline of nearly 9 basis points and on Friday were trading around 3.635%.

(Samuel Indyk)

FOR FRIDAY'S OTHER LIVE MARKETS POSTS

EUROPE GETS A LIFT FROM DEFENCE, BUT AUTOS, AI-VULNERABLE SHARES FALL AGAIN CLICK HERE

FED UNDER PRESSURE AS LAYOFFS MOUNT CLICK HERE