Pound Euro Exchange Rate Extends Downside as Rate Hike Rally Fades

Pound Euro (GBP/EUR) Exchange Rate Slips amid Waning Bullish Momentum and Brexit Jitters

(Updated 16:00, 18/11/21) The Pound Euro (GBP/EUR) exchange rate has extended its downside today as Sterling’s impressive rally ran out of stream. The pair has fallen by almost 0.5% since the opening of the session and is now trading at around €1.187.

The tailwind from the renewed rate hike bets died down surprising quickly, perhaps suggesting that the market is less sure of a Bank Rate rise in December than it initially seemed. As the Monetary Policy Committee (MPC) is likely still split over the best course of action, and many of their reasons for not hiking rates remain, GBP is seeing a small correction as confidence wanes.

In addition, Brexit tensions could be putting some pressure on the Pound (GBP). Although news regarding the Northern Ireland protocol has been more positive in recent days, worries remain.

And now a new fishing row with Denmark has broken out. The UK wants to ban destructive bottom trawling in a North Sea conservation zone, which Denmark says is a breach of the Brexit agreement. The UK is already dealing with a fishing dispute with France, and UK-EU relations are souring. GBP investors seem worried that Brexit headaches will continue.

Meanwhile, the Euro (EUR) is gaining ground today, which some analysts are attributing to a technical correction.

Comments from European Central Bank (ECB) officials today did not dent the single currency as they were fairly neutral and in line with the ECB’s expected communications.

Original article continues below:

Pound Euro (GBP/EUR) Exchange Rate Choppy as Rally Subsides 

The Pound Euro (GBP/EUR) exchange rate is wavering in a narrow range this morning as a lack of market-moving data on both sides leaves the pair without a clear direction. 

Sterling is still being supported by rate hike bets following yesterday’s decade-high CPI. Meanwhile, the Euro (EUR) is resisting further losses, perhaps due to its negative correlation with a slightly weaker US Dollar (USD). 

Pound (GBP) Softens after Yesterday’s Surge 

The Pound (GBP) has wavered this morning, trending downwards overall so far, as a lack of data leaves GBP investors without much impetus. 

Renewed rate hike bets have seen the Pound soar so far this week, with GBP/EUR hitting a fresh 21-month high. Hawkish comments from the Bank of England (BoE) Governor Andrew Bailey, strong post-furlough jobs data and UK inflation printing at a ten-year high have markets once again anticipating a rate hike at the bank’s next meeting. 

But after the BoE’s shock decision not to raise rates at its last meeting, markets may be more cautious this time round. 

Speaking yesterday about the UK’s CPI release, Rupert Thompson, Chief Investment Officer at Kingswood, commented: 

‘Along with [Tuesday’s] robust employment data, these numbers make a rate rise in December all the more likely – although after last month’s debacle it is dangerous to say this is a done deal.’ 

The economic calendar is quieter today, but these rate hike bets are still providing a slight tailwind for the Sterling and limiting losses. The Pound Euro pair is holding above €1.19 for the first time since February 2020, although it is creeping lower. 

Euro (EUR) Quiet amid Lack of Data 

The Euro is also fairly quiet, with three European Central Bank (ECB) speeches being the only events on the docket today. 

The single currency seems to be enjoying a slight weakening of the US Dollar (USD), which has relieved some of the pressure on the Euro due to the negative correlation between the two currencies. The US Dollar softened overnight and continues to trend down today as a risk-on mood weighs on the safe-haven currency. 

Pound Euro Exchange Rate Forecast: ECB Speak in Focus 

Looking ahead, the Pound Euro pair could remain in a narrow range today as markets take a breather following a dramatic start to the week. 

That said, upcoming speeches from European Central Bank (ECB) officials could cause movement in the Euro if they contain any hints about monetary policy. 

Forex markets broadly ignored an earlier speech from the ECB’s Fabio Panetta, as he focused on future plans for a digital Euro. Edouard Fernandez-Bollo, a member of the ECB’s Supervisory Board, is up at noon, followed by the bank’s Chief Economist Philip Lane a little later. If the tone from these two ECB officials is dovish, then the Pound Euro exchange rate may be able to regain the upside. 

As for the Pound, GBP investors will likely be influenced by domestic UK headlines. Could further Brexit tensions chip away at Sterling’s 21-month high? 

Samuel Birnie

Contact Samuel Birnie