Pound Euro (GBP/EUR) Exchange Rate Tumbles to One-Month Low after BoE Decision
(Updated 15:00, 04/11/21) The Pound Euro (GBP/EUR) exchange rate has plummeted today after the Bank of England (BoE) surprised markets by leaving monetary policy unchanged.
Traders had been expecting a rate hike from the bank after policymakers, including BoE Governor Andrew Bailey, made hawkish comments in the run-up to the meeting.
However, the Monetary Policy Committee (MPC) voted 7-2 in favour of keeping interest rates at a record low of 0.1% and 6-3 in favour of maintaining the same level of quantitative easing. As traders were almost certain that the bank would hike rates, the decision came as a shock and the Pound nosedived to one-month lows against many of its rivals.
Governor Bailey has subsequently been dubbed the new ‘Unreliable Boyfriend’, a nickname given to the former BoE Governor Mark Carney after he hinted at interest rate hikes that never came.
Bailey rejects this label, saying:
‘We didn’t say we were going to act at any particular meeting.’
The BoE has also cut its growth forecasts for the coming years. It expects UK GDP to grow at a slightly slower 7% this year and has trimmed next year’s growth rate from 6% to 5%. The bank then projects that growth will slow sharply to 1.5% and 1% in 2023 and 2024, respectively.
While the bank chose not to raise rates today, it did say that a hike could be necessary ‘over coming months’, if the UK’s economy continues to grow and the labour market stays strong. In particular, the bank will be looking at two key jobs data releases between now and its December meeting.
Keen to shake off accusations of being an ‘Unreliable Boyfriend’, Bailey was clear that this should not be taken as a hint that a December rate hike is coming:
‘Let me caution that by [saying] please do not therefore assume that I’m giving you a strong clue about anything, other than observing that there are two official labour market data releases between now and our next meeting in about six weeks’ time.’
The Pound Euro pair has plunged by almost 1% from this morning’s highs. It is currently trading just shy of €1.17, down over a cent from today’s top rate of €1.1811.
Original article continues below:
Pound Euro (GBP/EUR) Exchange Rate Limited as Markets Await BoE Decision
The Pound Euro (GBP/EUR) exchange rate has wavered today, edging higher so far, ahead of the Bank of England’s (BoE) interest rate decision.
The GBP/EUR pair is currently trading at around $1.18, up from a low of €1.172 in the overnight session.
Pound (GBP) Wavers ahead of BoE Decision
The Pound (GBP) has firmed against the Euro (EUR) so far this morning, although this seems to be due to the Euro’s weakness rather than any bullish behaviour from GBP investors. With the BoE interest rate decision coming up, forex traders are likely waiting to see what the British central bank decides to do.
On the one hand, UK inflation looks set to rise above 4% – twice the BoE’s target – by the end of the year. A rate rise could help to curb inflationary pressures.
On the other hand, if the bank hikes rates too early then it could stifle the UK’s fragile economic recovery. Higher borrowing costs could lead to lower levels of investment while also adding to the current squeeze on the cost of living.
Members of the nine-strong Monetary Policy Committee (MPC) are split. Last month Michael Saunders, one of the BoE’s more hawkish policymakers, warned households to prepare for a ‘significantly earlier’ rate rise.
Since then, commentary from the BoE Governor Andrew Bailey and Chief Economist Huw Pill has seemed to support expectations of a rate hike. Although both men have been rather vague, they expressed increasing concern about inflation and have not pushed back on rate hike bets.
However, two MPC policymakers have voiced clear opposition to raising interest rates. Silvana Tenreyro argued that it would be far wiser to wait to see how certain factors played out – such as the end of furlough and temporary pressures on inflation – before acting. She added that a rate hike could be ‘self-defeating’.
In addition, Catherine Mann said that the BoE could hold off because the expectation of a coming rate rise was leading to tighter market conditions all by itself.
Consensus among economists is that the MPC will vote 6-3 against a rate hike, although many analysts see a 5-4 vote in favour. With the decision on a knife edge, GBP investors are understandably cautious.
Euro (EUR) Muted amid USD Strength
Meanwhile, the Euro is currently under some pressure due to its strong negative correlation with the US Dollar (USD), which is firming today.
USD exchange rates are on the rise this morning after they dipped yesterday following the Federal Reserve’s tapering announcement. Markets were initially disappointed that the Fed didn’t take a more hawkish stance, but eventually the ‘Greenback’ gained from the Fed’s decision to tighten policy.
The single currency is also subject to some mixed data from Germany. German factory orders recovered in September, with the latest report posting 1.3% growth following August’s 8.8% slump. However, this was below expectations of a 2% rise in orders.
This mixed data may be giving the Euro some limited support today, but whether it’s enough to counteract the downward pressure exerted by USD’s strength remains to be seen.
Pound Euro Exchange Rate Forecast: BoE Decision in the Spotlight
Investors will be holding their breath ahead of the BoE decision. Experts are divided over how the bank will vote, and so the outcome is likely to cause significant movement either way. A rate hike could see GBP climb, although concerns over the UK’s economy might limit gains. If the BoE leaves rates unchanged then the Pound could slip.
Either way, there could be big movement in the Pound Euro exchange rate and some volatility as markets react.