Pound Euro (GBP/EUR) Exchange Rate Returns to Narrow Range after ECB Blip
(Updated 16:00, 10/3/22) The Pound Euro (GBP/EUR) exchange rate has stabilised after briefly slumping earlier.
The downside in Sterling came after the European Central Bank (ECB) surprised markets by accelerating the pace at which it will wind down monetary stimulus.
Policymakers will slow bond purchases from €40bn in April to €30bn in May and €20bn in June. Pandemic-era bond-buying could end as early as the third quarter of this year. At the bank’s previous meeting, officials said that asset purchases would be €40bn a month in the second quarter, €30bn a month in the third quarter and €20bn a month thereafter.
Although the ECB had hinted at a more hawkish approach, economists expected the bank to delay any big decisions on monetary policy due to the Russian invasion of Ukraine. The faster pace of tapering signals that the ECB is more worried about the upside risks to inflation than the downside risks to growth.
The Euro (EUR) spiked following this news, with GBP/EUR plunging 0.5% to a one-month low.
However, the Pound (GBP) managed to bounce back after the US CPI figures for February. US inflation hit a new 40-year high, as expected, giving the US Dollar (USD) a boost. EUR then suffered from its negative correlation to USD, relinquishing all of its post-ECB gains.
Another factor supporting GBP/EUR is that the ECB tried to temper the news of faster tapering by saying that rate rises would be ‘gradual’ and take place ‘some time after’ rather than ‘shortly’ after the end of bond purchases. This deliberate language indicates that the ECB wants to keep its options open and that a rate hike could still be delayed.
This contrasts to the Bank of England’s (BoE) approach. Markets expect the BoE to enact its third back-to-back rate hike next week, raising the Bank Rate to 0.75%. The Federal Reserve is also set to increase interest rates next week.
At the time of writing, GBP/EUR is trading at €1.19256, marginally higher than its opening level of €1.19215.
Original article continues below:
Pound Euro (GBP/EUR) Exchange Rate Rangebound as Investors Hold Their Bets
The Pound Euro (GBP/EUR) exchange rate is calm this morning as investors await both the European Central Bank’s (ECB) interest rate decision and peace talks between the Ukrainian and Russian foreign ministers.
At the time of writing, GBP/EUR is trading at €1.192, virtually unchanged from this morning’s opening level.
Euro (EUR) Quiet ahead of ECB Decision
The Euro (EUR) is subdued this morning ahead of the ECB interest rate decision.
Policymakers at the ECB face an increasingly challenging call on monetary policy. The Russian invasion of Ukraine will push inflation, which is already at a record level, even higher. However, it will also likely cause significant damage to the Eurozone economy. The ECB must decide which risk is greater and act accordingly.
At last month’s meeting, the central bank hinted at a shift in their view of policy. Previously, ECB President Christine Lagarde had said a rate hike in 2022 was unlikely. She did not repeat this assertion at the last meeting, leaving the door open for the bank to increase interest rates this year.
However, the Russia-Ukraine war has raised both the stakes and the level of uncertainty. Most economists expect the ECB to postpone any big decisions until the outlook is clearer, but the bank’s forward guidance could cause some sharp movement in the Euro.
Understandably, EUR investors seem hesitant to place any aggressive bets ahead of the meeting.
Pound (GBP) Stable as Russia-Ukraine Talks Begin
Meanwhile, the Pound is also muted amid a lack of UK economic data and a mixed market mood.
Prior to Russia’s invasion, Sterling was a more risk-sensitive currency than the safe-haven Euro. However, the Eurozone is particularly vulnerable to collateral economic damage from both the war and the devastating sanctions levelled at Russia. As a result, markets see EUR as a risky investment at the moment and the Pound has struggled to capitalise on any upbeat swings in risk sentiment.
Today, news from Ukraine is mixed. The resulting tepid market mood is keeping both GBP and EUR in a narrow range.
Humanitarian corridors are reportedly open for the third consecutive day. However, there are reports that Russian forces have taken control of parts of Mariupol amid ongoing airstrikes.
In addition, the foreign ministers from Russia and Ukraine – Sergei Lavrov and Dmytro Kuleba, respectively – are meeting in Turkey. This is the first time the two top diplomats have met since war broke out.
Markets hope that the talks will lead to a diplomatic solution, though trade remains muted as investors await updates. Turkish Foreign Minister Mevlüt Çavuşoğlu brokered the discussion and will help to mediate.
Pound Euro Exchange Rate Forecast: Big Movement Ahead for GBP/EUR?
At the moment, investors seem to be trading cautiously while awaiting the outcomes of both the ECB decision and the diplomatic discussion. These events could have significant impacts on GBP/EUR through today’s session.
Any progress in the peace talks could boost both the Pound and the Euro, although the single currency may rise higher than Sterling.
Meanwhile, if the ECB comes across as particularly dovish following its decision, EUR could slip.