Pound Euro (GBP/EUR) Exchange Rate Wavers as BoE and ECB Policy Meetings Approach
(Updated 16:00, 2/2/22) The Pound Euro (GBP/EUR) exchange rate has fluctuated today, finishing the European session marginally higher, as traders prepare for tomorrow’s central bank policy decisions.
An unexpected rise in the Eurozone CPI initially boosted the Euro (EUR) this morning. With Eurozone inflation at a record high, EUR investors are hopeful that the European Central Bank (ECB) may strike a more hawkish tone.
However, the single currency lost its gains in the afternoon.
One factor may have been the negative correlation between the Euro and the US Dollar (USD). USD/EUR bounced off a one-week low today after the latest American jobs data surprised markets. The US economy shed 301,000 jobs last month, rather than adding 207,000. This seems to have dented risk sentiment, thereby supporting the safe-haven US Dollar, whose strength adversely affected the Euro.
Another reason for the uptick in GBP/EUR may have been some end-of-day repositioning ahead of the central bank meetings. With the Bank of England (BoE) slated to raise rates again tomorrow, investors may have been keen to get their bids in before the session was over.
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Pound Euro (GBP/EUR) Exchange Rate Falls as Eurozone Inflation Rises ahead of ECB Decision
The Pound Euro (GBP/EUR) exchange rate has weakened today as an unexpected rise in Eurozone inflation raises hopes of a more hawkish tilt from the European central Bank (ECB).
Meanwhile, ongoing political turmoil and worries about rising energy bills in the UK weigh on the Pound (GBP).
Euro (EUR) Firms as Eurozone CPI Edges Higher
The Euro (EUR) initially wavered against the Pound this morning as investors awaited the latest Eurozone CPI. Overall, the single currency has strengthened, with the CPI printing higher than forecast.
Economists expected the Eurozone’s flash inflation rate for January to ease from 5% to 4.4%. Instead, inflation in the Eurozone edged up to a fresh record high of 5.1%.
If the CPI had dropped as expected, this would have supported the ECB’s narrative that price pressures are transitory. However, the latest reading turns the screw on the ECB to tighten monetary policy sooner than planned.
Michael Hewson, Chief Market Analyst at CMC Markets UK, explains that markets haven’t been convinced by the ECB’s attempts to brush off talk of a rate hike this year:
‘While [a drop in inflation] will be convenient for the European Central Bank to paint this as evidence of their argument that inflationary pressure is transitory and now falling, we already know from the experience of the US it is nothing of the sort.
‘… With markets already pricing in the prospect of two ECB rate rises this year, tomorrow’s ECB press conference will be an exercise in trying to spin a narrative that the market simply doesn’t buy.’
Now that Eurozone inflation has risen, markets are all the more convinced that the ECB will have to hike rates earlier than anticipated.
The ECB meets tomorrow to decide on monetary policy. Hopes that it may begin shifting its attention to the upside risks of inflation seem to be supporting the Euro today.
Pound (GBP) Slips amid Political and Eocnomic Headwinds
Meanwhile, the Pound is slipping against the Euro today amid a lack of UK economic data.
Political tensions continue to mire the UK currency, despite Boris Johnson’s attempt to draw a line under the ‘partygate’ scandal. On Monday, Johnson made a statement in the House of Commons following Sue Gray’s ‘update’ on her investigation into potentially lockdown-breaching parties in Number 10. Since then, the embattled PM has tried to move on from the issue.
However, new ‘partygate’ revelations and continued outrage from across the political spectrum have kept the issue alive. More Tory MPs have communicated their appetite for a confidence vote. The political uncertainty continues weighing on the Pound.
UK cost-of-living concerns are adding to GBP’s headwinds today. Tomorrow, the energy regulator Ofgem will announce the new energy price cap, which will come into effect in April.
Experts believe the cap could rise from 1,277 to 1,900 as global energy costs soar. Rising prices have seen around 30 energy companies go bust in the UK and have pushed up prices, contributing to a cost-of-living squeeze on households.
Expectations that the Bank of England (BoE) will vote for a second consecutive rate hike at tomorrow’s meeting may be cushioning Sterling’s downside today.
Pound Euro Exchange Rate Forecast: ECB and BoE in Focus
With no UK or Eurozone data due out for the rest of today’s session, GBP/EUR movement may be fairly limited.
Sterling may be susceptible to domestic political and economic news. If there are any breaking stories about the drama engulfing the governing Conservative party, this could negatively affect the Pound. Updates on the UK’s cost-of-living crisis could also impact GBP exchange rates.
Tomorrow’s key events will be the ECB and BoE policy decisions. The Pound Euro pair could gain off the back of a BoE rate rise. However, as a hike is already priced in, investors may be more focused on the forward guidance from both central banks. If the ECB shows increased concern about inflation, the Euro might have a chance to strengthen.