Pound to Euro Exchange Rate to Remain Under Pressure as BoE Updates Forecasts

Update: Pound Euro (GBP/EUR) Exchange Rate Supported as Italian Populists Move Closer to Power

As anticipation mounted ahead of the Bank of England’s (BoE) May policy announcement the Pound to Euro (GBP/EUR) exchange rate found some limited support.

Confidence in the Euro (EUR) was dented, meanwhile, by reports that an alliance between two populist parties could take power in Italy.

While this would put an end to the political limbo that has faced Italy since March’s inconclusive election this could offer more headaches for the Eurozone down the road, to the detriment of the single currency.

Pound Euro (GBP/EUR) Exchange Rate Loses Ground as UK Trade Deficit Widens

An unexpectedly sharp widening of the UK visible trade deficit has put additional pressure on the Pound to Euro (GBP/EUR) exchange rate ahead of the latest Bank of England (BoE) policy announcement.

Markets were not impressed to find that the deficit had grown from -£10.4 billion to -£12.2 billion in March, highlighting the continued vulnerability of the UK economy.

With the issue of the UK’s future relationship with the EU customs union still up in the air this decline in trade does not appear to bode well for the domestic outlook.

As the latest industrial production and construction output figures also proved rather disappointing this left Pound (GBP) exchange rates on a generally weaker footing as investors braced for the latest commentary from BoE Governor Mark Carney.

GBP/EUR Exchange Rate Shrugs Off Unsurprising ECB Economic Bulletin

Reaction to the European Central Bank (ECB) Economic Bulletin proved rather limited on Thursday morning, offering little in the way of support to the Pound to Euro (GBP/EUR) exchange rate.

The latest commentary from the ECB did not provide any real surprises to investors, leaving Euro (EUR) exchange rates without any particular rallying point.

As the ECB acknowledged the subdued nature of domestic inflation and the recent signs of slowing economic momentum the prospect of any shift towards tighter monetary policy remains limited.

With the US Dollar (USD) losing some of its previous bullishness, however, the mood towards the Euro has picked up.

Dovish BoE Outlook Expected to Weigh on GBP/EUR Exchange Rate Today

The Pound to Euro (GBP/EUR) exchange rate is likely to see some sharp moves in the wake of the BoE meeting today, as investors assess the future course of monetary policy.

If the Monetary Policy Committee (MPC) proves more positive in outlook than anticipated demand for the Pound (GBP) could strengthen significantly.

While the odds of an imminent interest rate hike have been all but priced out of GBP exchange rates investors still hope to see signs that the BoE remains on a tightening bias.

On the other hand, if the MPC votes unanimously in favour of leaving interest rates on hold this could leave the GBP/EUR exchange rate vulnerable to further losses.

A downward revision of the BoE’s forecasts in the quarterly Inflation Report may also weigh heavily on the appeal of the Pound.

Pound Euro (GBP/EUR) Exchange Rate Rally Forecast on Weaker German GDP

Although ECB President Mario Draghi is scheduled to speak on Friday this is unlikely to much influence the Pound to Euro (GBP/EUR) exchange rate.

Unless Draghi offers fresh commentary on the monetary policy outlook investors are not expected to find any additional reason to sell out of the Euro (EUR) ahead of the weekend.

However, EUR exchange rates could come under pressure next week with the release of the first quarter German gross domestic product data.

Confirmation that the Eurozone’s powerhouse economy is losing momentum would give the ECB further incentive to leave monetary policy on hold, to the benefit of the Pound to Euro (GBP/EUR) exchange rate.

Hannah Wilson

Contact Hannah Wilson