By FXEmpire.com
Yesterday the EUR/GBP extended the cautious rebound that had started earlier last week. The pair set a correction low at 0.7950 on Wednesday morning. The UK inflation report and the press conference from BoE governor King were rather soft on growth and didn’t exclude the option of more policy stimulation.
Sentiment on the euro remained negative, but the BoE comments provided a good excuse for some profit taking on sterling long positions. The rebound of EUR/GBP on Thursday and on Friday was not really impressive and the same applies for Monday. The pair shadowed the moves in EUR/USD, meaning that sideways trading in the morning session was followed by a brief fall lower.
However, once US equities had found their composure and staged a decent rebound, EUR/GBP followed EUR/USD higher, ultimately closing at 0.80949, marginally up from Friday’s close at 0.80777.
The euro came under some renewed pressure. The BoE supervisory body will launch on demand of parliament an inquiry into the BoE handling of the banking/debt crisis and into its forecasts for growth and inflation, which are often off target. This might trigger interesting headlines with governor King maybe under pressure. However, it is unlikely to have much effect now as the inquiry will only conclude in October and King will leave early next year when his term ends. The weakness of the euro overnight might be due to an “alarming” IIF study on the potential losses for the Spanish bank sector. The study was published on Friday but got only extensive news coverage overnight. Later today, the release of the UK CPI report for April will get a lot of attention.
Of late, the BoE has become more concerned about inflation and at the May meeting it didn’t prolong its asset buying programme. Anticipation on the end of QE certainly supported sterling ahead of the release of the BoE Minutes.
However, as these Minutes were after all rather soft, and BoE member Posen already regretted his turnaround away from demanding more QE, there is again more uncertainty about whether after all the BoE will restart at some point its QE. So, an upward surprise of CPI (and another letter of BoE Governor to the Chancellor) might stop the EUR/GBP rebound/help sterling regaining some strength. A surprisingly low CPI would support demand for more QE and thus be sterling negative. However, in a longer term perspective, the euro debt crisis and the fate of EUR/USD might be the overriding driver for the pair.
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Originally posted here
