Pound Euro Exchange Rate Extends Slide on Weakening Rate-Hike Hopes
(Update 16:46, 10/12/2021) The Pound Euro (GBP/EUR) exchange rate continues to slump this afternoon as a lack of significant data leaves Sterling to trade on this morning’s disappointing GDP data.
Investors’ hopes of an imminent interest rate hike from the Bank of England (BoE) are dwindling, as analysts at Scotiabank predict the central bank will hold rates at current levels next week. A spokesperson for the bank said:
‘OIS pricing still sees a roughly 40% chance, but we think it is almost certain that the bank holds. Given Saunders’s (top hawk) comments earlier this week that he would perhaps prefer to wait for more evidence on the Omicron front before altering policy, the bank could go as far as voting unanimously for a hold.’
Prior to policymaker Michael Saunders’s speech last Wednesday, the BoE’s stance on raising interest was unclear, with ambiguous comments from Governor Andrew Bailey shedding little light. In a speech last Monday, Bailey said that the direct economic effects of Covid had attenuated a lot since last year’s fall in GDP, but cautioned:
‘There are still impacts that we are feeling from Covid quite strongly… we have still got quite a long way to go.’
Also keeping Pound sentiment subdued are recent developments on the Brexit front. French President Emmanuel Macron has accused the UK of failing to keep its word on fishing licences; meanwhile, Annick Girardin, France’s sea minister, warned yesterday that it would call on the EU to go to litigation if the licences are not granted by this evening.
Original article continues below:
GBP/EUR Exchange Rate Muted as UK GDP Prints Below Expectations
The Pound Euro (GBP/EUR) exchange rate is falling slightly this morning as UK GDP missed predictions for 4.9% growth. Meanwhile, German inflation printed as expected – although the Euro faces downside over dovish messaging from the European Central Bank (ECB).
At the time of writing, GBP/EUR is trading at €1.1696, slightly down from today’s opening levels.
Pound (GBP) Pressured by Weak GDP, Omicron Headwinds
The Pound (GBP) is dropping against the majority of its peers this morning as UK GDP reported 0.1% growth in October – a notable deceleration from the 0.6% rise in the previous month.
Experts are interpreting the data as a sign that the economic outlook has deteriorated. According to James Smith, research director at the Resolution Foundation:
‘Today’s GDP data shows a worrying slowing in growth in October… as on-going supply-chain disruptions continue to hold back production in some sectors.
In response to the slowdown, some economists are speculating over the possibility of reintroducing economic support measures such as the furlough scheme.
The TUC in particular has called upon the government to reboot job protection measures, before new Omicron restrictions exacerbate problems for those already struggling.
TUC General Secretary Frances O’Grady says:
‘The UK’s recovery was already in the slow lane. This week’s new restrictions will slow it further… Ministers should reboot furlough right now to protect jobs and livelihoods.’
Euro (EUR) Firms Overall Despite Dovish ECB Comments
The Euro (EUR) is managing to climb this morning, although its prospects for the end of the year are weak according to analysts at ING Bank. Representatives of the bank forecast that only a hawkish tilt can turn the tide for the Euro now, as downside risks mount.
Nevertheless, German inflation data has provided a boost for the single currency, meeting expectations of 5.2% growth on a yearly basis – the highest rate since June 1992.
The data is well above the ECB’s target of 2%, although the central bank maintains that inflation is transitory: however, a deputy German finance minister disagrees, warning of ‘permanent inflation risks’.
Appropriate forward guidance will be discussed at the ECB’s meeting on 16 December: investors hope for more hawkish rhetoric, as policymakers’ dovish commentary has subdued Euro trading in recent weeks.
Reports reveal that the bank intends to boost its Asset Purchase Programme (APP) temporarily to soften the impact of an end to its emergency bond buying measures in March 2022. Just under half of economists polled by Bloomberg then expect an interest-rate increase in 2023.
GBP/EUR Exchange Rate Forecast: Central Bank Commentary to Dictate Movement?
A lack of further significant data for the remainder of today’s session leaves the Pound Euro exchange rate to trade on external factors.
Several ECB speeches later today may have some influence on markets; any indication of Bank of England (BoE) forward guidance could also influence the exchange rate, as investors speculate that the chance of monetary policy tightening in December has decreased with the rise in UK Omicron cases.