Pound Euro (GBP/EUR) Exchange Rate Extends Downside on BoE Caution
(Updated 16:00, 23/2/22) The Pound Euro (GBP/EUR) exchange rate continued falling today after four Bank of England (BoE) policymakers, including Governor Andrew Bailey, took questions from the Parliamentary Treasury Committee.
While the majority of policymakers said they saw inflation risks tilted to the upside, they all conceded that downside inflation risks remain. In addition, officials stressed that while more rate hikes are likely, they expect tightening to be ‘modest’. This mirrors the cautious tone struck by BoE Deputy Governor Dave Ramsden during a speech yesterday.
Silvana Tenreyro, an external member of the Monetary Policy Committee (MPC), said that the bank’s long-term forecasts still see inflation falling to target over the next three years, suggesting only ‘really modest’ tightening is needed.
Governor Bailey added: ‘It is a message to markets not to get carried away.’
At the BoE’s last interest rate decision, four of the nine members of the MPC voted for a steeper-than-expected rate hike of 50 basis points. This was a hawkish surprise. In response, markets priced in more muscular action from the central bank.
Now BoE officials sound as though they want to rein in these aggressive bets. Amid the Ukraine crisis and a lack of other data, this is weighing on the Pound (GBP).
GBP/EUR ended the European session today at €1.197, down 0.25% from its opening level.
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Pound Euro (GBP/EUR) Exchange Rate Falls amid BoE Testimony
The Pound Euro (GBP/EUR) exchange rate wavered lower this morning as Bank of England (BoE) Governor Andrew Bailey and his colleagues spoke before the Commons Treasury Committee.
Meanwhile, the Euro (EUR) shrugged off poor German data to rise against the Pound (GBP).
Euro (EUR) Firms despite German Data Miss
The Euro has firmed against the Pound so far today, despite a shock drop in German consumer confidence.
The GfK consumer climate indicator fell from -6.7 to a ten-month low of -8.1 heading into March. Economists expected it to edge up to -6.3.
The dip in confidence came as Covid cases in Germany ticked higher through late January into early February, remaining elevated. In addition, price pressures caused by soaring inflation also rattled German households.
However, consumers felt more hopeful in the medium term. The German government recently decided to begin lifting restrictions, with all protective measures to be removed by the end of March.
Rolf Bürkl, a consumer expert at GfK, explains:
‘[T]he outlook for the coming months is quite positive: Only recently it was decided to lift profound pandemic restrictions. This gives cause for hope that consumer spending will also return as a result. If this were to be supported by moderate price inflation, consumer sentiment could finally recover in the long term as well.’
This optimism for the months ahead may be boosting the Euro today.
Pound (GBP) Muted as MPs Question BoE Officials
Meanwhile, the Pound is subdued as the Parliament Treasury Committee grills the Bank of England Governor and three other members of the Monetary Policy Committee (MPC).
MPs are questioning the BoE’s previous narrative of inflation as ‘transitory’, as inflation has repeatedly exceeded expectations. Economists now expect UK inflation to peak at around 8% in spring. The highest inflation rate on record for the UK is 8.5%.
Rising inflation is increasing costs for UK households and businesses, as well as pushing up government debt repayments.
Yesterday’s public sector net borrowing figures showed that interest payments on government debt shot up to £6.1bn in January 2022, nearly four times higher than in the same month last year. In response, Chancellor of the Exchequer, Rishi Sunak, hinted at tougher measures in the March budget.
Policymakers are also giving their views on UK inflation moving forward, which they say presents both upside and downside risks. Their comments follow a relatively dovish speech yesterday from Dave Ramsden, one of the MPC’s most hawkish members, which weighed on the Pound.
At the time of writing, GBP investors seem hesitant to place bets as they listen to and digest policymakers’ comments.
Pound Euro Exchange Rate Forecast: BoE and Russia-Ukraine Crisis Could Cause Volatility
We may see more movement in the Pound Euro pair once the Treasury Committee meeting comes to a close. If officials’ answers suggest uncertainty or hesitancy, Sterling could slip.
The Russia-Ukraine crisis will likely also affect GBP/EUR throughout today’s session. Countries have continued to impose sanctions on Russia today in an attempt to deter further military action in Ukraine. However, Vladimir Putin has warned of ‘consequences’. If the crisis escalates, it could weigh on both the Euro and the Pound, though the single currency would likely bear the brunt.