GBP EUR Exchange Rate Forecast: Pound Could Jump if EU Leaders Signal Start of Brexit Trade Talks

Pound Sterling Gains on Euro after Central Bank Announcements

The Pound to Euro exchange rate (GBP/EUR) managed to largely retain gains on Thursday following interest rate decisions from the Bank of England (BoE) and European Central Bank (ECB).

Although Sterling dipped from its best levels, the pairing was still up 0.3% on the day despite the Pound recording losses elsewhere.

BoE’s Cautious Policy Outlook Leaves Sterling (GBP) Fluctuating

After initially rallying this morning on the back of some upbeat retail sales figures, Pound Sterling (GBP) has been forced to trim its gains this afternoon in the wake of the Bank of England’s (BoE) latest rate decision.

Unsurprisingly the BoE voted to leave interest rates on hold at today’s meeting, after raising rates for the first time in more than a decade in November.

Is was instead the BoE’s cautious outlook for future monetary policy which caused the dip in Sterling as it dampened hopes that the continued uptick in inflation and progress in Brexit negotiations would make the bank more hawkish.

While the bank welcomed the recent Brexit developments, suggesting the chances of a ‘disorderly’ Brexit were reduced, it warned that Brexit talks remain a major threat to the UK economy

The bank’s minutes read;

‘Developments regarding the United Kingdom’s withdrawal from the European Union – and in particular the reaction of households, businesses and asset prices to them – remain the most significant influence on, and source of uncertainty about, the economic outlook.’

This was a blow to investors, many of whom had hoped that the deal would cause the bank to strike a more hawkish tone regarding the possibility of further monetary tightening in 2018.

Euro (EUR) Exchange Rates Softer after Uninspiring ECB Statement

Not to be outdone, Euro (EUR) exchange rates also experienced volatility this afternoon as the European Central Bank (ECB) outlined its own policy plans for 2018, while leaving rates on hold at 0% as expected.

In its final meeting of the year the Bank confirmed its plans to begin tapering its bond buying programme from €60bn to €30bn next month, although remained open to the possibility of increasing purchases again if the economy weakens.

The bank also took the time to reaffirm its commitment to leaving rates on hold for the foreseeable future.

The ECB’s accompanying statement read;

‘The Governing Council expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases.’

The ECB’s dovishness can be largely attributed to the bank’s gloomy inflation outlook, with policymakers not expecting to see inflation near the bank’s target rate of 2% until at least 2020.

Pound to Euro Exchange Rate Forecast

Looking ahead, the central bank decisions make take a back seat to Brexit sentiment as Theresa May meets with EU leaders at the latest EU summit in Brussel.

The two day summit is a particularly important step in the Brexit process as EU leaders will vote whether the recent deal struck with the UK is enough to allow talks to move on to the second stage.

Therefore a positive outcome from the summit is likely to strengthen the Pound Euro (GBP EUR) exchange rate as it will allow trade discussions to finally get underway in 2018.

Adam Solomon

Adam joined the team at TorFX soon after graduating from University in 2005 with a degree in Journalism. Since then Adam has advanced to become both Head of Trading and Head of Treasury. His keen interest in the currency market and knowledge of what drives exchange rates makes him perfectly positioned to produce regular market updates focused on the movements of the major currencies.

Contact Adam Solomon