Pound Euro (GBP/EUR) Exchange Rate Holds on BoE Rate Hike Expectations
The Pound Euro (GBP/EUR) exchange rate is trading in a narrow range again today as markets anticipating tightening monetary policy from the Bank of England (BoE) provides support.
However, concerns over the UK household income squeeze, a downbeat economic growth outlook, and the Downing Street parties scandal continue to weigh on Sterling sentiment.
Meanwhile, the Euro has received support from a weaker US Dollar due to the negative correlation in the pairing, leaving GBP/EUR trading at €1.1859 at the time of writing.
Pound (GBP) Steady on Rate Hike Expectations
The Pound (GBP) is edging higher at the start of today’s session as expectations for more interest rate hikes from the BoE underpin Sterling support.
Comments from BoE chief economist Huw Pill yesterday appeared to suggest more interest rate rises are on the way, but emphasised that hikes should be gradual.
Pill’s cautious tone has capped upside in the Pound, warning against an ‘aggressive’ approach to raising rates and that wages need to fall in real terms to control inflation.
Pill explained:
“The longer that firms try to maintain real profit margins and employees try to maintain real wages, the more likely it is that domestically generated inflation will achieve its own self-sustaining momentum.”
Meanwhile, the ongoing police investigation into Downing Street parties continues to apply pressure on UK Prime Minister Boris Johnson, with the Metropolitan Police contacting 50 people in its inquiry into lockdown breaches.
Euro (EUR) Underpinned by Weaker USD
The Euro (EUR) is receiving modest support on Thursday morning due to its negative correlation with the US Dollar, which is directionless as investors wait for the release of US inflation data this afternoon.
Meanwhile, after European Central Bank (ECB) President Christine Lagarde eased expectations for swift monetary policy tightening earlier this week, hawkish comments from the Bundesbank President and ECB policymaker Joachim Nagel had a more limited impact on EUR exchange rates.
Regarded as a hawkish member of the ECB, Nagel said the central bank may need to raise interest rates in 2022.
He warned:
“If the (inflation) picture remains unchanged in March, I will be in favour of normalising monetary policy.”
“The first step is to discontinue the net asset purchases over the course of 2022. Then interest rates could be raised before this year is over.”
“If we act later we would have to raise interest rates more substantially and at a faster pace. Financial markets would then respond with greater volatility.”
Meanwhile, tensions between Russia and European countries continue to limit the Euro, as Russia starts 10 days of joint military drills with Belarus.
Pound Euro Forecast: GBP/EUR to Strengthen?
More BoE and ECB policymakers speaking today will likely drive movement in the Pound Euro exchange rate.
Investors will look for insight into the central banks’ future policy, with ECB Vice-President Luis de Guindos speaking this afternoon and BoE Governor Andrew Bailey this evening.
GBP investors also await UK GDP data released tomorrow.
While the fourth quarter is expected to indicate 1.1% growth suggesting the UK economy weathered the hit of the Omicron variant on the UK economy, Forecasts point to a -0.6% contraction in December.
Growth falling back in the final month of the year may fuel concerns over UK economic growth at the start of the year, particularly after recent BoE forecasts suggest ‘slow to subdued’ growth this year.
The key catalyst for the Euro will likely be US inflation data released this afternoon.
With forecasts indicating US inflation rose again in January to 7.3%, bets may increase for more aggressive monetary policy tightening from the Federal Reserve which may dent EUR sentiment due to the growing policy gap between the Fed and ECB.