Pound Plunges as BoE Wrong-Foots Markets, Fed Boosts USD

GBP/EUR Exchange Rate: Pound Plummets on BoE Decision

The Pound Euro exchange rate sank at the end of last week after the Bank of England (BoE) wrong-footed markets by leaving interest rates unchanged at 0.1%.

Investors had widely expected the BoE to hike interest rates due to rising inflationary pressure and comments from policymakers in the lead up to the meeting. Instead, the surprise decision triggered an aggressive GBP selloff.

However, the central bank signalled it could raise interest rates in the ‘coming months’ if the employment market develops as expected, while the Bank waits to see the effect of the furlough scheme ending.

UK unemployment data released next Tuesday is before the job support scheme ended, but investors will look to wage growth data after BoE Governor Andrew Bailey said they will have to act if inflation begins to push wages higher.

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

The Pound US Dollar exchange rate plunged to a five-week low at the end of last week as Brexit-related tensions added to Sterling’s losses, amid ongoing UK-EU talks.

Reports that the UK could activate Article 16 of the Northern Ireland protocol to suspend parts of the agreement threatens to escalate UK-EU tensions, potentially disrupting trade between the two sides.

Looking ahead, UK GDP data published tomorrow may weigh on GBP/USD. Forecasts point to third quarter growth slowing to 1.5%, down from 5.5% in the second quarter.

Combined with inflation figures released next week expected to show a rise to 3.4% in October, the Pound could come under pressure and fears of stagflation may increase again.

USD/GBP Exchange Rate: US Dollar Surges on Fed Taper

The US Dollar soared against the Pound at the end of last week after the Federal Reserve announced that it would taper its $120 billion monthly asset purchases by $15 billion each month, with the pandemic stimulus ending in mid-2022.

Fed chair Jerome Powell reiterated the US central bank’s stance that inflation is transitory, and that a recovering jobs market is key before thinking about raising interest rates.

Better-than-expected bumper US non farm payrolls figures of 531,000, above forecasts of 450,000, added to optimism over the strength of the US economy and supported USD. But a risk-on mood and softening Treasury yields dented GBP/USD this week.

US inflation data for October released this afternoon looks set to drive significant movement in USD/GBP. Forecasts indicate the headline inflation rose to 5.8% last month, up from 5.4%.

EUR/USD Exchange Rate: Euro Fluctuates on Mixed Data

The Euro has fluctuated versus the US Dollar over the last week on mixed German and Eurozone data releases.

Unexpected contractions in German industrial production and exports in September, and declining Eurozone retail sales dented EUR sentiment, while a drop in Eurozone unemployment to 7.4% and a better-than-expected jump in the German ZEW economic sentiment index provided support to the Euro.

Following the BoE’s interest rate decision, the single currency made gains on the perceived policy gap narrowing between the UK’s central bank and the European Central Bank (ECB)

Looking ahead, Eurozone industrial production for September may weaken EUR, with a second consecutive month of contraction expected, although improving Eurozone trade data released next Monday may bolster the Euro.

Andrew Roberts

Contact Andrew Roberts