EUR/GBP: Pound falls to 2-month low against euro as BOE rate hiking cycle likely over

• BOE officials vote 5-4 to keep rates on hold, first pause in almost 2-years
• Traders are no longer fully pricing in anymore quarter point rate rises
• Global bond market selloff saw Gilts rise 8.4bps to 4.292%

The British pound went into freefall mode after the BOE unexpectedly kept rates on hold.  The outlook has dramatically changed in a few weeks and investors are concerned about growth prospects. BOE governor Bailey noted that it’s premature to talk about rate cuts and right now it seems that if growth deteriorates going forward, they will likely not need to deliver any more hikes.  Inflation data is still very troubling and has a long way to come down before policymakers will want to even consider cutting rates.

US stocks are tumbling as a global market selloff has investors rattled that interest rates are not going to come down anytime soon.  Higher for longer could eventually translate into no Fed rate cuts in 2024.  The Fed sees a labor market that is not weakening and the key drivers of inflation are still likely to keep prices elevated.  Today’s jobless claims data shows that mass layoffs haven’t started yet, which should support consumer spending trends.  Existing home sales are weakening and that will likely continue, while the volatile Philly Fed showed broad weakness, while prices paid and received both increased.

While the market is believing the BOE and ECB might be done raising rates, rough economic times are quickly coming to Europe as both the Fed will keep the global bond market selloff going and as OPEC+ will keep energy prices heading higher.

BOE

The British pound fell to the lowest levels in six months after BOE decided to keep rates on hold at 5.25%.  At the start of the month, FX markets thought the BOE would be delivering two quarter-point rate rises and now it looks like they are done tightening.  The vote was 5-4, as Cunliffe, Greene, Haskel, and Mann supported a 25bps rate rise.  This pause in the BOE rate hiking cycle will likely be met with quickly deteriorating data that could support the argument that they are done.

The pound has been under pressure since mid-July so the downside momentum might be limited.  A lot of the bad news has been priced in, so we might see prices stabilize around the 1.2075 region. The 1.20 level is a huge price barrier but that won’t be tested unless US growth exceptionalism remains the dominant theme over the coming weeks.

EUR/GBP Daily Chart

The surprise BOE hold sent the British pound to the weakest levels in two months against the euro. Price action on the EUR/GBP daily chart shows price has major resistance from the both the psychological 0.8700 level and the 200-day SMA.  If bullish momentum continues, upside targets include the 0.8738 level followed by 0.8790.  To the downside, 0.8625 provides initial support.  Major support resides at the 0.8545 level.

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