Pound Euro Exchange Rate Extends Downside following BoE’s Saunders Speech

Pound Euro (GBP/EUR) Exchange Rate Hits 18-Day Low on Dovish BoE Comments

(Updated 16:40, 03/12/21) The Pound Euro (GBP/EUR) exchange rate continued its downside this afternoon as dovish comments from Bank of England (BoE) rate-setter Michael Saunders weighed on Sterling.

Saunders, who voted for a rate rise last month, further dampened dwindling rate hike expectations. He said that the Omicron variant complicated the December decision by increasing uncertainty, adding:

‘It is within the range of possibilities that the new Omicron variant will significantly affect the economic outlook.’

Saunders is one of the BoE’s most hawkish policymakers. As such, his comments make a December rate hike look far less likely than it was pre-Omicron. If Saunders is expressing doubts about a rate hike, then the less hawkish officials at the bank will likely also opt for caution.

As a result, the Pound Euro exchange rate has fallen to an 18-day low. The pair is currently trading at €1.170, 0.6% down from this morning’s opening level.

Original article continues below:

Pound Euro (GBP/EUR) Exchange Rate Falls following Final PMIs 

The Pound Euro (GBP/EUR) exchange rate has slipped today amid a risk-off market mood and the release of the finalised composite PMIs for both the UK and the Eurozone. 

GBP/EUR is currently trading at around €1.174, down over 0.2% from today’s opening level of €1.1777. 

Pound (GBP) Dented by Cautious Mood and Low Business Morale 

The Pound (GBP) is subdued this morning as a downbeat market mood favours the safe-haven Euro (EUR) over the perceived riskier Pound. 

Markets are cautious today amid multiple concerns. Overnight, ride-hailing company Didi announced plans to delist from the New York Stock Exchange and move its listing to Hong Kong, stoking fears about broader US-China tensions. Meanwhile, rate-hike bets and Omicron both weigh on the market mood. 

The Pound seems to have found no support from the UK’s fairly positive PMIs. 

The UK’s final PMI results show that business activity growth remained strong last month, although it did slow down marginally. The composite PMI came in at 57.6, a smidgen below both the preliminary result of 57.7 and October’s reading of 57.8. 

The services PMI revealed a strong output growth overall, with noteworthy rises in new business and export sales. However, staff shortages and supply chain disruption continued to cap growth. In addition, business optimism hit a 12-month low as soaring inflation and economic headwinds hit morale. 

Euro (EUR) Strengthens as Eurozone Growth Accelerates 

The Euro (EUR) strengthened from the start of the session, despite dovish comments from the European Central Bank (ECB) President Christine Lagarde. 

Earlier this morning, Lagarde once again pushed back on rate hike expectations. She told attendees of the Reuters NEXT online conference that the market is ‘very unlikely to see rate hikes in 2022’. 

Lagarde also said that the Eurozone is different from the US, with different inflationary pressures and more slack in the labour market. She expects Eurozone inflation to begin easing soon. 

While this initially weighed on the Euro, some positive PMI data then helped to reverse the downside and EUR/GBP began rising again. Although revised slightly lower, the finalised composite PMI for November revealed that growth in the Euro area picked up for the first time in four months. 

However, as with the UK PMI, the report shows a mixed picture. The service sector drove most of the acceleration in growth, with supply-side disruption still constraining European industry. While demand and new orders increased, capacity pressures continued to build and inflation led to higher costs and charges. These concerns could be capping the Euro’s gains. 

The single currency is also supported by the Eurozone’s latest retail sales figures. Sales recovered by 0.2% in October, as economists expected. Although not a particularly impressive result, the rise in retail sales is likely adding to EUR’s appeal. 

Pound Euro Exchange Rate Forecast: US Data to Hit EUR? 

Looking ahead, upcoming US data could have a big effect on the Pound Euro pair. The non-farm payrolls report is the most impactful release this afternoon, but the US unemployment rate, services PMI and factory orders are also due out. 

With the results set to be broadly positive, and with the Federal Reserve taking a more hawkish stance in recent days, the US Dollar (USD) could strengthen. If it does, this may exert some downward pressure on the Euro due to the currencies’ negative correlation.  

As for the Pound, comments from Bank of England (BoE) policymaker Michael Saunders could potentially support Sterling. As a known hawk, Saunders may stoke up expectations of a BoE rate hike. 

Samuel Birnie

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