Pound Euro (GBP/EUR) Exchange Rate Rallies on BoE Rate Hike Bets
(Updated 16:00, 29/10/21) The Pound Euro (GBP/EUR) exchange rate has strengthened today, although ongoing Brexit concerns and a higher-than-expected Eurozone CPI may have limited the upside. GBP/EUR is currently trading at €1.1842, up 0.19% from this morning’s opening level.
The upside seems to have come as investors’ attention turned away from the European Central Bank (ECB) decision, which was ultimately dovish, and towards the Bank of England’s (BoE) upcoming meeting next week.
Expectations of a BoE rate hike may have been boosted by the better-than-expected economic forecast from the Office for Budget Responsibility (OBR).
In addition, Chancellor Rishi Sunak revealed during his budget that he had written to BoE Governor Andrew Bailey. Sunak said:
‘I’ve written to the Governor of the Bank of England today to reaffirm their remit to achieve low and stable inflation, and people should be reassured they have a strong track record in doing so.’
The comments suggest that the Chancellor is encouraging the BoE to tighten monetary policy sooner rather than later. This may be raising bets for a November rate hike, which in turn could be boosting the Pound (GBP).
However, stronger-than-expected CPI and GDP growth data from the Eurozone may be limiting EUR’s losses. And escalating Brexit tensions between France and the UK could be capping GBP’s gains.
Original article continues below:
Pound Euro (GBP/EUR) Exchange Rate Rangebound in Run-Up to Eurozone Inflation Rate
The Pound Euro (GBP/EUR) exchange rate is trading sideways so far this morning as markets remain fairly quiet ahead of the latest Eurozone inflation figures.
The pair is currently trading at €1.1822, marginally higher than this morning’s opening level of €1.1819.
Pound (GBP) Muted on Brexit Concerns
The Pound (GBP) remains subdued this morning after edging slightly higher overnight, with a mixed picture of the UK economy and Brexit concerns continuing to keep the Pound in a narrow range.
Data from the Office for Budget Responsibility (OBR) over the last few days has shown that the impact of the pandemic on the UK economy is less than initially feared. The OBR raised its forecast for UK economic growth this year from 4.1% to 6.5% while decreasing its expectations for economic scarring on GDP from 3% to 2%.
However, the OBR also said that Brexit will negatively impact long-term UK GDP by 4% – twice as much as the pandemic.
This assessment comes as Brexit tensions are bubbling between the UK and France. A dispute over access to fishing waters has led to the French authorities seizing a British fishing vessel, a move widely condemned by the UK.
This move comes after Paris has threatened to block access to ports, impose stricter checks on cross-Channel travel and even limit energy supplies to the Channel Islands.
Many are concerned that the row could escalate into a trade war, with the UK saying it is ready to retaliate.
Speaking to Sky News, environment minister George Eustice said that France’s threats were ‘unacceptable’, adding:
‘if they do bring these in to place, well two can play at that game. We obviously reserve the ability to respond in a proportionate way.’
These concerns seem to be preventing the Pound’s upside so far today, despite headwinds for the Euro (EUR).
Euro (EUR) Flat ahead of Eurozone CPI
Meanwhile, the Euro is quiet this morning as EUR investors await October’s flash inflation rate.
Economists expect inflation to rise from 3.4% to 3.7%, well above the European Central Bank’s (ECB) target of 2%.
Yesterday, the Euro jumped during the ECB’s policy decision. Even though the bank struck a dovish tone, traders brought forward their forecasts for an earlier-than-expected rate hike.
Investors are likely now holding back from placing any aggressive bets on EUR, preferring instead to see how the Eurozone CPI prints.
The Euro may also be slightly subdued by Germany’s disappointing GDP results. In the third quarter of this year, German GDP growth unexpectedly slowed to 1.8%, raising further concerns about the state of Europe’s largest economy.
The German economy has been hit particularly hard by the pandemic, with the manufacturing sector struggling to recover amid a global supply chain crisis and surging energy costs. This latest sign that the recovery is faltering may be weighing on the Euro.
Pound Euro Exchange Rate Forecast: Eurozone Inflation in Focus
The Eurozone CPI is in the spotlight for EUR investors today. If inflation hits or exceeds forecasts then the Euro could climb, whereas a weaker print may dent the single currency.
US data this afternoon may also affect EUR exchange rates, due to the negative correlation between the US Dollar (USD) and the Euro. If US inflation jumps, or if personal income beats forecasts, a rebound in USD might undermine EUR.
As for the Pound, many investors will be watching to see how the France-UK dispute will play out. The UK has summoned the French Ambassador in an attempt to resolve the issue. If these talks are constructive, GBP may find some support.