Pound Euro Exchange Rate Extends Upside on Central Bank Policy Divergence

Pound Euro (GBP/EUR) Exchange Rate Strengthens Further as Fed Announcement Weighs on EUR

(Updated 15:30, 27/1/22) The Pound Euro (GBP/EUR) exchange rate has continued to climb this afternoon as the Euro (EUR) suffers a sell-off.

The single currency was hit hard by the Federal Reserve’s hawkish forward guidance last night. Following the Fed’s decision, the US Dollar (USD) soared, putting intense pressure on EUR due to the currencies’ negative correlation.

USD has extended its upside today, causing EUR to slip further.

The Pound (GBP) has been able to capitalise on this thanks to similar hawkishness from the Bank of England (BoE). With the BoE likely to enact its second post-pandemic rate hike next week, the European Central Bank (ECB) lags behind. This policy divergence is weighing heavily on the Euro following the Fed meeting.

In addition, better-than-expected retail sales data from the Confederation of British Industry (CBI) may also have boosted Sterling. The distributive trades survey rose from 8 to 28 month on month. This was much higher than the score of 13 that economists had expected. However, sales did remain below seasonal norms.

At the time of writing, GBP/EUR is trading at a six-day high of just over €1.20. The Pound Euro pair is up one cent from this week’s lowest level.

Original article continues below:

Pound Euro (GBP/EUR) Exchange Rate Climbs amid EUR Weakness 

The Pound Euro (GBP/EUR) exchange rate has gained ground this morning, as the Euro (EUR) faces selling pressure amid a strengthening US Dollar (USD). 

However, Sterling could find its gains limited. A risk-off market mood could favour the safer Euro over the Pound (GBP), while the UK’s political turmoil continues. 

Euro (EUR) Struggling following Hawkish Fed Announcement 

The Euro is on the back foot this morning as it suffers from its negative correlation to a strengthening US Dollar

USD surged higher last night after the Federal Reserve struck a hawkish tone at its latest policy meeting. 

The US central bank signalled that its hiking cycle would start in March, as economists expected. However, Fed Chair Jerome Powell indicated that the Fed could hike harder and faster than markets had anticipated. 

Speaking to reporters following the decision, Powell said there is ‘quite a bit of room to raise interest rates’. Analysts took Powell’s commentary to suggest a steeper pace of interest rate rises was possible, with the Fed chief not ruling out consecutive rate hike meetings. 

Not only did this boost USD, thereby weighing on EUR, but it also widened the gap between the Fed’s monetary policy and the European Central Bank’s (ECB). Policy divergence has dented the single currency over the past few months, with the ECB determined to maintain its loose approach. As a result, the Euro is slipping this morning. 

A better-than-expected German consumer confidence report may be cushioning the downside. The GfK consumer climate indicator unexpectedly edged up heading into February. However, morale remains low so any support is likely limited. 

Pound (GBP) Gains Capped by Political Uncertainty 

Meanwhile, the Pound faces headwinds of its own. GBP/EUR’s gains seem primarily due to the Euro’s weakness. 

The Fed decision has spooked markets, which had grown used to favourable financial conditions. The jittery market mood may be limiting Sterling’s gains, as investors consider the Pound a riskier investment than the Euro. 

In addition, the UK’s political turbulence looks set to drag on a little longer. Sue Gray’s inquiry into ‘partygate’ is yet to be published, with the report delayed due to final legal checks. Some expect the findings to be released today or tomorrow, yet the Business Secretary, Kwasi Kwarteng, indicated that they might not be published until next week. 

According to the Guardian newspaper, Tory rebels stand at the ready to trigger a vote of no confidence in Boris Johnson. 

Uncertainty over the UK’s premiership, and the perception that the scandal is impacting Johnson’s ability to govern the country, could be capping GBP’s gains today. 

Pound Euro Exchange Rate Forecast: Could EUR Bounce Back? 

As the day progresses, we could see the Pound succumb to downward pressure. 

The latest data from the Confederation of British Industry (CBI) might provide some support for Sterling, as economists expect the distributive trades retail sales balance to have improved this month. 

However, ‘partygate’ developments (if there are any) could overshadow the CBI data. 

As for the Euro, if the market remains risk averse then the safe-haven single currency may recoup some losses. 

Looking to the end of the week, German GDP data could leave EUR investors with a sour taste. Europe’s largest economy looks likely to have contracted in the fourth quarter of 2021. As a result, GBP/EUR could end the week on a high note. 

Samuel Birnie

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