Pound Euro Exchange Rate Holds near 20-Month High

Pound Euro (GBP/EUR) Steady Following BoE Bailey Comments

The Pound Euro (GBP/EUR) exchange rate is holding just below 20-month highs at the start of this week after moving above €1.18 on Friday.

Comments from Bank of England (BoE) Governor Andrew Bailey are supporting GBP exchange rates today following hints from the central bank’s policymakers last week about rising inflation and raising interest rates.

Pound (GBP) Supported by BoE Hints

The Pound (GBP) is holding its recent gains against the Euro today after BoE Governor Andrew Bailey reiterated concerns over rising inflation in the UK and that the central bank will ‘have to act’.

The governor’s most recent comments again suggest that interest rates will rise soon, with some investors pricing in a rise at the end of this year or in early 2022.

In an online panel of central bankers, Bailey said:

“Monetary policy cannot solve supply-side problems – but it will have to act and must do so if we see a risk, particularly to medium-term inflation and to medium-term inflation expectations.

“And that’s why we at the Bank of England have signalled, and this is another such signal, that we will have to act.

“But of course, that action comes in our monetary policy meetings.”

Bailey’s comments come against the backdrop of soaring energy prices, staff shortages, and supply chain problems that are increasing inflationary pressure and threatening economic growth, triggering fears of stagflation in the UK economy.

BoE Monetary Policy Committee (MPC) members appeared split last week on raising interest rates, with comments from Michael Saunders and chief economist Huw Pill hinting at a rate hike, while Catherine Mann and Silvana Tenreyro hinted that it would be better to wait, and raising rates could be ‘self-defeating.’

Euro (EUR) Steady on Risk-Off Trade and ECB Comments

The Euro (EUR) is firm today as a global risk-off market mood is allowing EUR to make gains against more risk-sensitive currencies, although EUR/GBP is struggling due to Pound strength.

Amid a lack of notable Eurozone data releases, market mood and the diverging policy stances appearing between the European Central Bank (ECB) and other major central banks, such as the Federal Reserve and BoE, on rising inflation and tightening monetary policy is causing movement in the Euro.

Speaking at an IMF event over the weekend, ECB President Christine Lagarde reiterated the bank’s stance that ‘inflation is largely transitory’, saying:

“Monetary policy will continue supporting the economy in order to durably stabilise inflation at our 2% inflation target over the medium term.

“The ECB is committed to preserving favourable financing conditions for all sectors of the economy over the pandemic period.

”Once the pandemic emergency comes to an end, which is drawing closer, our forward guidance on rates, as well as asset purchases, will ensure that monetary policy remains supportive of the timely attainment of our target.”

Pound Euro Forecast: UK and EU Inflation Data to Drive GBP/EUR Volatility

High-impact UK and EU inflation data released on Wednesday will likely be the key driver of GBP/EUR in the coming days.

With UK inflation expected to remain at a nine-year high of 3.2% in September, the same as August, the Pound looks set for volatility.

If analysts perceive the data to support the case for a BoE interest rate hike, GBP could extend its recent gains.

At the same time, as the ECB’s loose monetary policy stance appears to remain unchanged, confirmation that the Eurozone inflation rate rose to 3.4% in September could weigh on EUR exchange rates over concerns inflationary pressure could damage consumer spending and business activity in the bloc.

Andrew Roberts

Contact Andrew Roberts