UPDATE 14.55 23-09-2021: Bank of England Tapering Signal Boosts Pound Euro Exchange Rate
The Pound Euro (GBP/EUR) exchange rate received a boost after the Bank of England (BoE) signalled that the case for modest tightening of monetary policy ‘appears to have strengthened.’
The BoE left interest rates unchanged and voted to maintain its quantitative easing bond-buying programme at £895bn.
However, two policymakers on the Monetary Policy Committee (MPC) voted to reduce the amount of bonds the central bank buys.
As the bank warned that consumer price inflation will rise above 4% by the end of the year, analysts see the likelihood of tighter monetary policy increasing and a potential interest rate hike as early as March 2022.
The BoE’s MPC minutes showed:
“CPI inflation was expected to rise further in the near term, to slightly above 4% in 2021 Q4, owing largely to developments in energy and goods prices.
“The material rise in spot and forward wholesale gas prices since the August Report represented an upside risk to the MPC’s inflation projection from April 2022, and meant that CPI inflation could remain above 4% into 2022 Q2, all else equal.
“Most other indicators of cost pressures had remained elevated. The Committee’s central expectation continued to be that current elevated global cost pressures would prove transitory. Indeed, there were still good reasons to expect material supply responses in commodity and other global markets, pushing down on future input prices and import costs.”
The prospect of an interest rate hike has pushed the Pound up approximately 0.5% against the Euro above €1.17.
Pound Euro (GBP/EUR) Exchange Rate Steady ahead of Bank of England Interest Rate Decision
The Pound Euro (GBP/EUR) exchange rate is holding steady this morning ahead of the Bank of England’s (BoE) interest rate decision announcement at midday.
GBP/EUR is hovering around yesterday’s closing levels at €1.1659 while investors wait for hints on the BoE’s policy amid increasing economic uncertainty in the UK.
Meanwhile, weaker-than-expected Eurozone and UK PMI data has left the Pound Euro exchange rate without direction this morning as investors await the BoE decision.
UK PMI Data Weighs on GBP Exchange Rates
The Pound is struggling so far today following September’s PMI data. Private sector activity is down from August’s levels as UK economic uncertainty weighs on GBP exchange rates.
Manufacturing growth missed forecast and slowed to 56.3, below the 59 expected, and weaker-than-expected service sector growth dipped to 54.6, down from 55, indicating the slowest growth in 7 months.
Combined with the UK’s mounting energy crisis that has weakened the Pound Euro exchange rate this week, additional concerns over the UK economic recovery are limiting GBP strength.
Chris Williamson, Chief Business Economist at IHS Markit explains:
“The September PMI data will add to worries that the UK economy is heading towards a bout of ‘stagflation’, with growth continuing to trend lower while prices surge ever higher.
“While there are clear signs that demand is cooling since peaking in the second quarter, the survey also points to the business activity being increasingly constrained by shortages of materials and labour, most notably in the manufacturing sector but also in some services firms. A lack of staff and components were especially widely cited as causing falls in output within the food, drink and vehicle manufacturing sectors.”
Euro Dented as Eurozone PMIs Miss Forecasts
EUR exchange rates lack direction so far this morning. Although Eurozone and German PMI data both showed lower-than-expected readings, the Euro’s negative correlation with the US Dollar, which is sliding today, is limiting the single currency’s losses.
Eurozone manufacturing PMI data for September showed expansion at 58.7, missing forecast of 60.3 and down on August’s 61.4 reading.
At the same time, the services PMI also missed forecast but indicated growth with a 56.3 reading, down from 59. The lower figures show a slowdown in business activity growth in the bloc. However, the data is still above the 50 mark that indicates growth.
Supply chain problems, costs rising at the fastest rate in 21 years, and coronavirus continue to create difficult conditions for businesses in the EU.
Pound Euro Forecast: BoE Decision to Drive GBP/EUR Movement
The BoE’s latest rate decision will be the key driver in Pound Euro movement today.
Against the backdrop of slowing growth and economic uncertainty driven by the energy crisis, staff shortages, rising inflation and supply chain issues, BoE forward guidance hints could drive volatility in Sterling.
While the central bank will likely leave interest unchanged, GBP investors will look for signals in tightening monetary policy and possible quantitative easing reductions.
Meanwhile, the upcoming German Federal election will continue to leave the Euro without clear direction. Potential uncertainty in Germany may stoke volatility in EUR exchange rates as the ruling Christian Democratic Union (CDU) looks set to lose power in the Eurozone’s powerhouse economy.
September’s Ifo Business Climate index could drive additional movement in the Pound Euro exchange rate as business sentiment in Germany is expected to have fallen again this month.