Pound Tumbles amid BoE Uncertainty, USD Firms before Fed

GBP/EUR Exchange Rate: Pound Dips ahead of BoE Decision

The Pound Euro exchange rate has retreated from near a 20-month high last week to a three-week low yesterday.

Shifting expectations for an interest rate hike from the Bank of England (BoE) at its November meeting have driven movement in Sterling.

GBP/EUR had made solid gains in recent weeks but Thursday’s meeting appears finely balanced as to which way the nine policymakers on the monetary policy committee (MPC) will vote on a rate hike, which has dented the Pound this week.

Whichever way the MPC votes on whether to raise interest rates at tomorrow’s meeting, Sterling could be set for significant swings, with additional movement driven by the tone of the BoE’s forward guidance.

GBP/USD Exchange Rate: Brexit-Related Tensions Dent Pound

The Pound US Dollar exchange rate has trended lower over the last week, plunging on Friday following renewed Brexit-related tensions.

An escalating row between the UK and France over post-Brexit fishing rights, and ongoing UK-EU talks on the Northern Ireland protocol appearing to make little progress have weighed on the Pound US Dollar exchange rate.

Mixed finalised PMI data for October has also stoked volatility in Sterling. While the manufacturing PMI unexpectedly rose higher than forecast, the data revealed production output growth slowed to an eight-month low.

The finalised services PMI released today lent modest support to GBP/USD by showing a better-than-expected acceleration of growth in the sector, with activity at its fastest rise in three months, although cost inflation is at its highest in 25 years.

Looking ahead, GBP/USD looks likely to remain sensitive to the ongoing UK talks with France and the EU, as well as headlines over coronavirus cases in the UK.

USD/GBP Exchange Rate: US Dollar Firm ahead of Fed

The US Dollar has strengthened against the Pound over this week ahead of the Federal Reserve’s interest rate decision later today, despite volatility following the third quarter US GDP reading unexpectedly missing forecast at 2%, instead of the 2.7% expected.

However, the US Dollar rallied on Friday and extended its gains into this week as souring market sentiment lifted safe-haven demand for the currency, and US Treasury yields rose.

As the Federal Open Market Committee (FOMC) meeting began yesterday, investors are eagerly anticipating the Fed’s monetary policy announcement later today.

With the US central bank widely expected to announce plans to taper its bond-buying programme, plans on the pace of tapering, policymakers’ stance on inflation and the US job market, and hints on raising interest rates will drive additional movement in USD.

EUR/USD Exchange Rate: Euro Weakens amid US Dollar Strength

The Euro fluctuated against the US Dollar last week, gaining sharply following the European Central Bank’s (ECB) interest rate decision due to comments from President Christine Lagarde on inflation.

However, EUR gains were short-lived and plunged on Friday following better-than-expected third quarter GDP and higher-than-expected inflation, as the Euro’s negative correlation with a rallying US Dollar sent it tumbling.

EUR/USD has steadied since the start of this week as markets await interest rate decisions from the Federal Reserve and BoE.

Looking ahead, rebounding German factory orders and industrial production data may support EUR, although forecast lower finalised Eurozone services PMI for October, stalling September retail sales, and declining ZEW economic surveys for November may weigh on the Euro.

Andrew Roberts

Contact Andrew Roberts