In a dovish turn, Mr Saunders said it was uncertain that Britain would leave the EU smoothly and explained: “The economy right now is clearly not overheating – the underlying pace of growth, stripping out all of the funny effects, inventories, car shutdowns and so forth, is weak and below trend.” The BoE policymaker also hinted that he wouldn’t be under pressure to vote in favour of higher interest rates just because the bank’s forecasts suggested it would be necessary to aid inflation.
Meanwhile, Sterling is struggling ahead of the announcement of the UK’s new leader of the Conservative party and next Prime Minister.
The pound was left muted amid bets that frontrunner Boris Johnson will become the new Prime Minister and push for a hard Brexit.
Commenting on this, General Manager of Research at Gaitame.com Research Institute, Takuya Kanda said:
“Johnson is expected to become the new Prime Minister, so there is a real chance of a hard Brexit.
“In the short term, further declines in the pound could be limited because positions are already very short. In the medium term, sentiment for Sterling will remain soft.”
On Monday, the euro broadly softened in response to expectations that the European Central Bank (ECB) will signal a rate cut.
Markets expect ECB President Mario Draghi to signal a cut in September in order to keep inflation close to the bank’s target.
The euro was also left under further pressure as tensions between Italy’s coalition government, made up of League and the 5-Star Movement, increased.
League leader Matteo Salvini warned that he would quit unless 5-Star dropped its opposition to certain projects.
Looking ahead to this afternoon, the euro could soften following the release of the flash Eurozone consumer confidence if sentiment slides.
However, even if the euro weakens, the GBP/EUR exchange rate is likely to decline today as a result of the latest UK political developments.