Pound Euro (GBP/EUR) Exchange Rate Strengthens as Policy Divergence Caps EUR
(Updated 16:30, 16/3/22) The Pound Euro (GBP/EUR) exchange rate reversed this morning’s losses and managed to zigzag higher through the rest of the day’s trade.
The rally came as risk appetite continued to improve, thereby boosting the risk-sensitive Pound (GBP).
Comments from China’s Vice Premier Vice Premier Liu He cheered investors overnight. The top policymaker signalled that Beijing would roll out policies to promote economic growth and support capital markets.
The positive mood continued into the European session amid promising comments from both Russia and Ukraine about the progress of peace talks. This culminated in a report from the Financial Times that negotiations had made ‘significant progress’ towards a tentative 15-point peace plan.
The Euro initially also benefitted from the upbeat tone among European investors. However, the looming rate rise from the Federal Reserve seemed to weigh on EUR as evening approached.
The European Central Bank (ECB) is yet to raise rates, while the Fed is set to hike its fed funds rate for the first time since 2018. If the US Dollar (USD) climbs in response, EUR could suffer from its negative correlation to the American currency.
In addition, most economists expect the Bank of England (BoE) to enact a third consecutive rate hike at Thursday’s meeting.
This central bank policy divergence may have capped EUR’s gains, allowing GBP/EUR to strengthen.
Original article continues below:
Pound Euro (GBP/EUR) Exchange Rate Softens as Upbeat Mood Boosts EUR
The Pound Euro (GBP/EUR) exchange rate has wavered lower this morning as the prospect of peace in Ukraine cheers European markets.
Looking ahead, will the looming Federal Reserve rate decision put a limit on the single currency’s gains?
Euro (EUR) Firms on Possibility of Russia-Ukraine Compromise
The Euro (EUR) wavered higher against the Pound (GBP) this morning as markets remain hopeful for a diplomatic solution to the Russia-Ukraine crisis.
Ukrainian President Volodymyr Zelenskiy sounded upbeat last night about the progress of peace talks. In a video address, Zelenskiy said that Russia’s positions in negotiations ‘sound more realistic’. In addition, Ukrainian presidential aide Mykhailo Podolyak said there was ‘certainly room for compromise’.
Meanwhile, Russian Foreign Minister Sergei Lavrov said today that both sides are close to agreeing on the first parts of a possible peace deal.
This comes as Russian negotiator Vladimir Medinsky said that peace talks were difficult but that Russia ‘sincerely’ wants peace. Medinsky said:
‘The negotiations are hard, going slowly. Of course, we would like it all to happen much faster, this is a sincere desire of the Russian side. We want to come to peace as soon as possible.
‘We need a peaceful, free, independent Ukraine, neutral – not a member of military blocs, not a member of Nato.’
These upbeat developments are cheering European markets, as an end to the war would limit the economic damage wreaked on the Eurozone.
However, violence continues in Ukraine. Some cities, particularly Mariupol, are in dire positions, and civilian casualties are rising. This, along with some cynicism about Russia’s sincerity, is capping risk sentiment today.
Pound (GBP) Underperforms the Euro amid Upbeat Market Mood
The risk-sensitive Pound is also enjoying the more positive market mood, but EUR has the advantage. The Eurozone economy is far more exposed to the Ukraine crisis than the UK economy. As a result, the upbeat mood is boosting EUR more than GBP.
Pound Euro Exchange Rate Forecast: EUR to Falter ahead of Fed Decision?
As the day progresses, more developments in the Russia-Ukraine war could drive GBP/EUR. If the sentiment remains positive, the Euro could gain more ground.
However, EUR investors may become more hesitant as we move towards the Federal Reserve interest rate decision this evening.
Fed officials have signalled that they will hike interest rates for the first time since 2018. Markets will be scrutinising the following press conference to assess just how aggressively the Fed will tighten monetary policy.
The decision is likely to cause some significant movement in the US Dollar (USD). As EUR has a strong negative correlation with USD, any Fed-fuelled movement could impact the Euro.