EUR/GBP rallies to near 0.8380 after BoE’s dovish interest rate decision

• EUR/GBP refreshes weekly high near 0.8380 after the BoE reduced its interest rates by 25 bps to 4.5%, as expected.
• Surprisingly, BoE policymaker Catherine Mann supported a larger-than-usual interest rate reduction of 50 bps.
• The BoE sees a temporary uptick in price pressures due to higher energy prices.

The EUR/GBP pair surges and posts a fresh weekly high to near 0.8380 in Thursday’s North American session. The cross strengthens as investors have dumped the Pound Sterling (GBP) after the Bank of England’s (BoE) monetary policy decision in which the central bank reduced its key borrowing rates by 25 basis points (bps) to 4.5%.

Traders had already priced in a 25-bps interest rate decision but with an 8-1 vote split. However, all Monetary Policy Committee (MPC) members supported an interest rate cut and two out of them (Swati Dhingra and Catherine Mann) favored a larger reduction by 50 bps. Investors were shocked after seeing Catherine Mann’s support for a larger-than-usual rate cut as she has been an outspoken hawk.

Apart from an ultra-dovish tone from the MPC, downwardly revised Gross Domestic Product (GDP) forecasts have also weighed on the British currency. BoE’s monetary policy report shows that the central bank has projected a decline in the United Kingdom's (UK) growth rate by 0.1% in the last quarter of 2024 against the 0.3% economic expansion projected in November. The central bank has also revised GDP growth for the current quarter lower to 0.1% from 0.4%.

It appears that the conversion of Catherine Mann’s restrictive stance to ultra-dovish is driven by a weak economic outlook.

Meanwhile, the BoE expects a temporary acceleration in the headline Consumer Price Index (CPI) to 3.7% before returning to the 2% path due to a rise in energy prices.

On the Euro (EUR) front, the outlook of the shared currency has weakened as ECB policymaker and Governor of Bank of Portugal Mario Centeno said in an interview with Reuters on Wednesday that interest rates could move below the neutral rate “sooner rather than later”. ECB Centeno’s dovish remarks were based on the assumption that the Eurozone economy is unable to hold inflation near the central bank's target of 2%.