Pound Euro (GBP/EUR) Exchange Rate Firms as BoE Raises Interest Rates and ECB Ends PEPP
(Update 14:30 16/12/2021) After briefly spiking following the Bank of England’s decision to raise interest rates, the Pound Euro exchange rate retreated to more modest gains following the European Central Bank’s (ECB) monetary policy announcement.
The BoE monetary policy committee surprised many investors by voting 8-1 to raise interest rates to 0.25% from 0.1%.
Markets had expected the UK’s central bank to leave rates unchanged amid increasing uncertainty surrounding the Omicron variant and rising Covid-19 cases in the UK, as well as the risk posed by slowing growth after the UK’s services PMI tumbled on Omicron fears.
However, as inflation soared more-than-expected to 5.1% in November, and the UK jobs market appeared unaffected by the end of the furlough scheme with unemployment falling to 4.2% in the three months to October, the BoE monetary policy committee raised rates to combat inflation rising further.
The minutes from the meeting said:
“At its November meeting, the Committee judged that, provided the incoming data, particularly on the labour market, were broadly in line with the central projections in the November Monetary Policy Report, it would be necessary over coming months to increase Bank Rate in order to return CPI inflation sustainably to the 2% target.”
Fears over the threat of the Omicron variant pushing up inflation also prompted the BoE to raise rates, with the minutes saying:
“There was, however, also a strong case for tightening monetary policy now, given the strength of current underlying inflationary pressures and in order to maintain price stability in the medium term. The economic impact of the new variant could, in some scenarios, increase these inflationary pressures further.”
Pound Euro exchange rate gains have been limited, however, as the BoE downwardly revised growth forecasts to 0.6% in the fourth quarter, down from 1%.
ECB Cuts Emergency Stimulus Support
Meanwhile, the ECB left interest rates unchanged as expected, and announced the end of its pandemic emergency purchase programme will end in March 2022.
However, the ECB will temporarily increase its assets purchase programme to €40 billion per month in the second quarter of 2022, lowering to €30 billion in the third quarter.
Original article continues below:
Pound Euro (GBP/EUR) Exchange Rate Struggles as Record High UK Covid Cases Dent Service Sector
The Pound Euro (GBP/EUR) exchange rate is trading in a narrow range so far on Thursday ahead of the Bank of England (BoE) and European Central Bank (ECB) interest rate decisions in the middle of the day.
Amid record high Covid-19 cases in the Britain, UK and Eurozone PMI data released this morning revealed unexpected drops in both services PMIs as Omicron fears take hold, leaving GBP/ EUR trading at € 1.1742 at the time of writing.
Pound (GBP) Muted as UK Services Growth Slows
The Pound (GBP) lacks strong direction during Thursday morning’s trade following a weaker-than-expected UK services PMI for December ahead of the BoE interest rate decision at midday.
Sterling has had its strength limited by UK PMI data released that revealed service sector activity dropped to 10-month low, fuelling fears over UK GDP growth.
The services PMI for December came in at 53.2, well below forecast of 57, and nearer the 50 mark that indicates stagnation.
Falling business and consumer confidence driven by Omicron concerns hit the hospitality and travel sectors in particular.
Chris Williamson, chief business economist at IHS Markit, commented:
“The flash PMI data show the UK economy being hit once again by Covid-19, with growth slowing sharply at the end of the year led by a steep drop in spending on services by households.
“With Covid-19 infections set to rise further in coming weeks due to the spread of the Omicron variant, and more restrictions being introduced, the pace of economic growth looks likely to continue to weaken as we head into 2022.”
Meanwhile, Sterling had received some support from the UK delaying border checks on goods moving between Britain and Ireland that were due to come into effect on 1 January, increasing hopes for progress in Northern Ireland protocol talks in the new year.
Euro (EUR) Rangebound ahead of ECB
The Euro (EUR) is trading in a narrow range so far today in anticipation of the ECB’s December monetary policy meeting and interest rate decision.
However, EUR exchange rates have come under some pressure after the Eurozone’s manufacturing and services PMIs indicated activity in the private sector slowed in December.
Although the manufacturing PMI beat forecast by coming in at 58, the figure was a slight slowdown on last month’s 58.4.
Meanwhile, growth in the Eurozone’s service sector fell to a nine-month low, with a reading of 53.3 and below forecast of 54.1.
Restrictions in countries across the bloc and Covid-19 fears weighed heavily on the service sector, with Germany’s services reading falling into contraction territory at 48.4.
IHS Markit chief business economist Chris Williamson said:
“The Eurozone economy is being dealt yet another blow from Covid-19, with rising infection levels dampening growth in the service sector in particular to result in a disappointing end to 2021.
Anticipation of the ECB monetary policy announcement this afternoon is keeping the Euro in a narrow range.
Forecasts strongly point to the ECB leaving interest rates unchanged, but for the central bank to maintain its loose monetary policy.
Analysts expect the ECB to announce the end of its pandemic emergency purchase programme (PEPP) in March, and offset the impact of it ending by doubling its asset purchase programme (APP) to €40 billion per month.
Pound Euro Forecast: Soaring UK Covid-19 Cases to Dent GBP?
The Pound may experience more volatility in the coming days, starting with the BoE interest rate decision and monetary policy announcement.
With the UK central bank widely expected to leave interest rates unchanged as the emergence of the Omicron variant fuels uncertainty, GBP investors will likely look to the BoE’s forward guidance for signals of rate hikes in 2022.
After data this week indicated a strengthening UK job market, and inflation unexpectedly jumped to 5.1%, pressure on the BoE to tighten monetary policy next year appeared to increase.
However, record high cases of Covid-19 in the UK and the threat of new restrictions may weigh heavily on GBP exchange rates.
During a Downing Street announcement, chief medical officer Chris Whitty warned of ‘two epidemics on top of each other’ due to the Omicron variant, and said “don’t mix with people you don’t have to.”
The cautious message and risk posed by further restrictions looks to have dented consumer confidence, reflected in the UK services PMI.
Meanwhile, combined with the ECB rate decision today, the German Ifo business climate index may drive additional movement in the Euro, with business morale set to decline for a sixth consecutive month, which may be worse than feared in light of the German services PMI published today.