ING: The pace of UK interest rate cuts may be faster than in the Eurozone

Investing.com - Tuesday, as the interest rate differential narrowed, the EUR/GBP exchange rate saw upward fluctuations, but it fell on Wednesday morning after expectations for a rate cut emerged from the European Central Bank.

ING said there are two factors that could drive the UK toward a deeper dovish repricing than in the euro area. The Bank of England was already preparing to cut rates before the start of the war. In addition, the UK is expected to become the OECD country most affected by the energy shock, providing an argument for a dovish stance.

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In remarks made outside the last meeting, Bank of England officials sounded less hawkish.

ING maintains an upward bias for EUR/GBP and expects the Bank of England’s full tightening policy to be priced out. The firm believes 0.880 is a realistic target for the currency pair.

As of 10:55 a.m. Greenwich Mean Time, the British pound strengthened against the U.S. dollar; GBP/USD was at 1.3310, up 0.6%. The euro weakened versus the pound; EUR/GBP was at 0.8717, down 0.2%.

Since the Middle East war began on February 28, the pound has been highly volatile; the latest development is that U.S. President Donald Trump said U.S. forces would withdraw from Iran within two to three weeks. Trump said his goal of eliminating the country’s nuclear threat has been achieved.

On Wednesday, the Bank of England’s Monetary Policy Committee warned that the Middle East conflict has delivered a major blow to the global economy, raising energy prices and increasing market volatility, thereby heightening financial stability risks.

The conflict between Israel and the United States with Iran has effectively already halted shipping through the Strait of Hormuz and has reduced energy production in the Gulf region. Oil prices have surged to more than $100 per barrel; Brent crude is up more than 60% versus pre-conflict levels. European and UK natural gas prices have jumped more than 70% versus pre-conflict levels.

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