Pound Euro (GBP/EUR) Exchange Rate Looks to Hold €1.20
The Pound Euro (GBP/EUR) exchange rate is continuing to creep higher again today on interest rate hike expectations from the Bank of England (BoE) and easing UK Covid-19 measures.
Meanwhile, comments from European Central Bank (ECB) President Christine Lagarde have dented EUR sentiment by reinforcing the policy divergence between central banks.
GBP/EUR is hovering around €1.20 again on Thursday after touching a new 23-month high during yesterday’s session.
Pound (GBP) Strengthens on Bank of England Rate Hike Expectations
The Pound (GBP) is edging higher on Thursday as markets strongly expect an interest rate rise from the BoE in its February policy meeting.
BoE Governor Andrew Bailey bolstered expectations for a rate hike yesterday afternoon while appearing before the UK government’s Treasury Select Committee.
Bailey warned of risks posed by high inflation and that price rises could persist longer-than-expected into 2023.
He said some pressures outside of the central bank’s control should be shorter term but look set to linger, commenting:
“Some aspects of current inflation ought to be transitory, such as energy and supply chains.”
However, his comments on the UK’s labour market further suggested to investors that an interest rate rise is likely in February.
More signs appearing of inflationary pressure in broad-based wage rises in the UK economy are evidence of ‘second-round’ effects, and that ‘the very tight labour market is a concern’. He warned:
“(We) need to keep in mind inflation pressure from the labour market, this influenced my thinking on December rate rise.
“The tight labour market has the potential to put upward pressure on wage negotiations.”
Meanwhile, the Pound has also received support from the UK government announcing that Covid-19 Plan B measures begin easing from today.
Sajid Javid, UK Health Secretary, said today marks a new chapter in the fight against Covid-19, and added that the UK is ‘leading Europe in the transition from pandemic to endemic and showing the world how you can live with Covid’.
Euro (EUR) Dented by Lagarde Comments
The Euro (EUR) is coming under pressure today following comments from ECB President Christine Lagarde and the finalised Eurozone consumer price index confirming previous estimates that inflation in the bloc soared to a record high 5%.
The divergent policy stance and views on surging inflation between the central banks has again dented EUR sentiment.
As the BoE and Federal Reserve have begun to respond to soaring inflation that threatens to linger longer than expected by tightening monetary policy, the ECB stance continues to maintain that inflation is transitory.
In contrast to comments from BoE governor Andrew Bailey, Lagarde views surging energy prices and supply chain bottlenecks ‘stabilising and easing gradually in course of 2022’, instead of in 2023 as suggested by Bailey.
Lagarde also defended the ECB’s looser monetary policy in comparison to the Federal Reserve. She explained:
“The cycle of the economic recovery in the U.S. is ahead of that in Europe. We thus have every reason not to act as rapidly and as brutally that one can imagine the Fed would do.
“But we have started to react and we obviously are standing ready, to react by monetary policy measures if the figures, the data, the facts demand it.”
She also added that inflation was higher in the U.S.
Pound Euro Forecast: GBP/EUR to Continue Testing Key Level?
The Pound Euro exchange rate looks set to continue testing the €1.20 level going into the weekend as UK economic optimism and expectations for the BoE to raise interest rates underpins Sterling support.
However, UK retail sales for December released on Friday morning may dent the Pound. Forecasts point to sales having contracted -0.6% as the Omicron variant dented consumer confidence, which may spark concerns over weaker UK economic growth in the fourth quarter of 2021 going into this year.
Meanwhile, more comments from ECB President Christine Lagarde may stoke volatility in the Euro again tomorrow, if the perceived policy gap widens between the central bank.
Eurozone consumer confidence data released on Friday afternoon may also weigh on EUR exchange rates as moral is expected to fall to its lowest level since March 2021.