Pound Euro (GBP/EUR) Exchange Rate Plunges as ECB Meeting Gets Underway
(Updated 15:10, 28/10/21) The Pound Euro (GBP/EUR) exchange rate suddenly dropped by €0.005 in a matter of minutes as the European Central Bank’s (ECB) policy meeting began earlier this afternoon.
As ECB officials convened for the bank’s interest rate decision, the Euro (EUR) spiked across the board.
Although the ECB left policy unchanged and struck a broadly dovish tone following the decision, the single currency has so far managed to hold on to most of these gains.
ECB President Christine Lagarde reiterated the bank’s view that inflation is temporary, citing three key factors: surging energy prices, global demand outpacing supply, and the low base effect of Germany’s VAT cut last year.
However, Lagarde conceded that inflationary pressures seem to be more persistent than initially thought. This has raised bets for an earlier tightening of policy from the ECB, even though Lagarde pushed back against this saying traders’ expectations didn’t match the bank’s forward guidance.
The Euro has also been boosted by its strong negative correlation to the US Dollar (USD), as US GDP growth slowed by more than anticipated. Economists expected quarter-on-quarter GDP to ease from 6.7% in the second quarter of this year to 2.7% in the third. Instead, the US economy expanded by only 2%.
Worries of a slowdown in the US economy triggered a steep sell-off in USD, thereby supporting the Euro.
The Pound Euro exchange rate is currently trading at €1.1812, down 0.5% from today’s high of €1.187.
Original article continues below:
Pound Euro (GBP/EUR) Exchange Rate Climbs in Run-Up to ECB Policy Meeting
The Pound Euro (GBP/EUR) exchange rate has jumped higher today, as EUR investors remain subdued ahead of the European Central Bank’s (ECB) interest rate decision.
Meanwhile, Sterling has strengthened against the single currency following yesterday’s autumn budget. However, gains might be capped as opinions on the budget are mixed.
Pound (GBP) Firms following Yesterday’s Budget
The Pound (GBP) has gained against the Euro (EUR) so far today, as markets digest both the autumn budget and improved economic forecasts.
Yesterday’s forecast from the Office for Budget Responsibility (OBR) gave a more optimistic outlook than the last forecast in March. The OBR expects the UK economy to grow by 6.5% by the end of this year, up from 4.1%. In addition, the fiscal watchdog downgraded expectations of post-pandemic scarring to the UK economy from 3% to 2%.
However, the Pound’s upside may be limited as the UK economy still faces risks and uncertainty from both the pandemic and Brexit. The OBR highlighted the ongoing challenges posed by supply chain disruption and rising inflation, while also predicting that Brexit will damage UK GDP by 4% – twice as much as Covid.
In addition, the autumn budget could be assisting the Pound’s upside. Chancellor Rishi Sunak unveiled an extra £150bn of government spending yesterday as he said the UK was entering an ‘age of optimism’.
Yet, once again, gains may be capped. Views on Sunak’s policies are, unsurprisingly, mixed. Some are praising Sunak’s public ‘spending spree’ and his vow to cut taxes in future. Others are criticising the current increase in taxes, arguing that households will foot the bill while facing a huge rise in the cost of living.
With the economic outlook better than was forecast back in March, and more money in the coffers for spending on public services, Sterling is strengthening today. However, the caveats may mean that its gains are limited.
Euro (EUR) Retreats ahead of ECB Decision
Meanwhile, the Euro is on the back foot this morning, as EUR investors await the ECB’s interest rate decision.
Economists expect the ECB to maintain its ultra-accommodative monetary policy, as the bank has signalled that it will not hike rates until 2024 or begin tapering until March 2022 at the earliest.
This dovish stance has dented the Euro significantly in recent weeks, causing it to fall to a 20-month low against the Pound. EUR investors are therefore understandably hesitant to place any aggressive bets in the run-up to the meeting.
A larger-than-expected fall in German unemployment reported earlier this morning may be cushioning the single currency’s downside, but the focus is certainly on the ECB meeting.
Pound Euro Exchange Rate Forecast: ECB Decision in the Spotlight
As the day goes on, the Pound Euro pair could hold its gains, as the looming ECB decision may keep pressure on the single currency.
If the ECB strikes a dovish tone following its meeting then the Euro could slip further. However, any signs that the bank is beginning to worry about inflation, or any unexpected announcements, could boost EUR exchange rates.
Meanwhile, GBP investors will likely be focused on the autumn budget. Now that economists and think tanks have had time to crunch the numbers, we should see some more detailed analyses of Sunak’s plans and how they may affect the UK economy.
Brexit concerns could also play a part in the Pound Euro pair today, after Boris Johnson said yesterday that the conditions for triggering Article 16 have been met.
If Brexit tensions bubble, this could dent GBP.