Pound at Risk, Euro May Rise on ECB and BOE Rate Decisions

The British Pound appears vulnerable while the Euro may rise after the BOE and ECB deliver their monetary policy announcements.

Talking Points

British Pound at Risk as Bank of England Introduces Forward Guidance
Euro May Rise if ECB Opts Not to Expand Rhetoric on Interest Rate Path

Monetary policy announcements from the European Central Bank (ECB) and the Bank of England (BOE) headline the economic calendar in European trading hours. Both central banks hinted at a move toward “forward guidance” as their policy strategy at last month’s meetings, but the BOE is likely to take a more formal approach than the ECB.

The significance of today’s BOE meeting was spelled out in no uncertain terms in July’s policy statement: “[The] Chancellor had requested that the [MPC] provide an assessment, alongside its August Inflation Report, of the case for adopting some form of forward guidance, including the possible use of intermediate thresholds. This analysis would have an important bearing on the Committee’s policy discussions in August.”

With that in mind, the markets will be on the lookout for the adoption of defined language signaling how long the central bank plans maintain an accommodative policy posture, which may be expressed in terms of time and/or specific economic data outcomes (similar to the path taken by the Fed). Such an outcome is likely to be interpreted as a broadly dovish shift in the BOE’s position, leading the British Pound lower.

Turning to the ECB, a loose kind of forward guidance was introduced at July’s meeting, with central bank President Mario Draghi saying interest rates will “remain at present or lower levels for an extended period of time.” Eurozone economic news-flow has continued to improve relative to expectations since the ECB’s last sit-down, hinting the central bank may not see the impetus to push policy further to the accommodative side of the spectrum at this stage. The Euro is still tracking policy expectations, so a status-quo outcome may prove near-term supportive for the single currency.

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