Pound Euro (GBP/EUR) Exchange Rate Continues Climb on BoE Rate Hike Bets and Risk-On Mood
(Updated 15:15, 1/2/22) The Pound Euro (GBP/EUR) exchange rate has continued to climb today, despite some fluctuations, ahead of the central bank interest rate decisions on Thursday.
Markets expect the Bank of England (BoE) to raise its Bank Rate from 0.25% to 0.5%, while the European Central Bank (ECB) will leave interest rates unchanged. This policy divergence is supporting Sterling and weighing on the single currency today.
In addition, a slight improvement in market mood seems to be favouring the riskier Pound (GBP) over the safe-haven Euro (EUR). This is evident in the equity markets, with the FTSE 100 up 0.8% and the STOXX 600 up 1.2% at the time of writing. US markets are also attempting to move higher, but with limited success.
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Pound Euro (GBP/EUR) Exchange Rate Climbs on Policy Divergence
The Pound Euro (GBP/EUR) exchange rate has firmed today as investors move on from yesterday’s political excitement to look ahead to the upcoming central bank policy decisions.
With the Bank of England (BoE) likely to raise rates and the European Central Bank (ECB) as dovish as ever, GBP/EUR is on the rise.
Pound (GBP) Shrugs Off Political Concerns
The Pound (GBP) has wavered higher against the Euro (EUR) so far this morning as investors shrugged off yesterday’s ‘update’ from Sue Gray’s ‘partygate’ inquiry.
Gray had to strip back the report due to the ongoing police investigation into 12 of the 16 identified gatherings. This meant the findings were not as politically explosive as expected.
While many still see the ‘update’ as damning, Boris Johnson has managed to avoid an immediate challenge to his leadership. As a result, the political headwinds that have been buffeting Sterling seem to have eased.
Investors now turn their attention to the BoE interest rate decision in two days’ time. Economists expect the BoE to raise its Bank Rate to 0.5%, and these expectations are likely supporting the Pound.
Euro (EUR) Slips ahead of Central Bank Meetings
Meanwhile, the Euro has lost ground against Sterling this morning amid some mixed Eurozone data.
German retail sales data disappointed investors earlier on. Sales in December slumped by 5.5% – far worse than the 1.4% contraction economists had expected.
However, later German data beat forecasts. The unemployment rate in Europe’s largest economy unexpectedly dropped by 0.1 percentage points. Meanwhile, the unemployment change figure printed at -48,000, compared to the consensus forecast of -6,000.
The latest unemployment rate from the Eurozone was also upbeat. December’s rate dropped to 7% while November’s rate was revised down from 7.2% to 7.1%. Analysts had expected the unemployment rate to have printed at 7.2% in both November and December.
But despite the positive employment data, the single currency has slipped. While GBP investors look to the BoE’s decision, EUR investors await the ECB meeting.
The ECB is likely to remain dovish, particularly after Germany’s CPI yesterday confirmed that inflation eased in January. This policy divergence between the two central banks is weighing on EUR and supporting GBP.
Pound Euro Exchange Rate Forecast: Sterling to Strengthen ahead of BoE?
Looking ahead, the central bank meetings will be increasingly on investors’ minds as they draw nearer. As mentioned, the policy divergence between the two central banks favours the Pound over the Euro, so we could see GBP/EUR climb.
Tomorrow’s flash inflation rate for the Eurozone in January could also cause some movement. Economists expect inflation to ease from 5% to 4.4%. This would support the ECB’s rationale behind its approach to monetary policy. However, it would also dash any lingering hopes that higher-than-expected inflation would force the ECB to tighten policy sooner than expected. As a result, Sterling could gain.
Finally, while GBP investors seem to be leaving ‘partygate’ behind in today’s trade, the scandal is far from over. Boris Johnson still faces calls to resign as he may have misled Parliament, while senior Conservative MPs continue to withdraw their support. Any new or unexpected developments have the potential to impact GBP exchange rates.