Pound Euro (GBP/EUR) Exchange Rate Slumps after BoE Slashes Growth Forecasts
(Updated 13:00, 5/5/22) The Pound Euro (GBP/EUR) exchange rate tumbled following the Bank of England (BoE) interest rate decision at noon. Although the BoE raised rates by 25 bps, with three of the nine policymakers voting for a steeper increase of 50 bps, the bank also issued a stark warning on the UK’s economic outlook.
The BoE believes the UK is heading for a recession as the cost-of-living crisis is set to worsen. According to BoE projections UK inflation will now peak at a whopping 10% in autumn.
The Pound Euro pair plunged after the decision and currently remains in freefall.
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Pound Euro (GBP/EUR) Exchange Rate Wobbles amid Timid Trade
The Pound Euro (GBP/EUR) exchange rate is trading close to a one-week low today ahead of the Bank of England (BoE) interest rate decision.
After the UK central bank meeting, we could see some sharp movement in the Pound Euro pair.
Pound (GBP) Muted ahead of BoE Rate Decision
The Pound (GBP) seems subdued today, wavering near a one-week low, as GBP investors hold back aggressive bets ahead of the BoE rate decision.
Markets expect policymakers to vote for a fourth consecutive rate hike of 25 bps. This would bring the Bank Rate up from 0.75% to 1% – its highest level since March 2009.
However, the BoE must grapple with the prospect of a slowing UK economy. Surging costs and higher taxes are hitting households and businesses alike. Consumer spending and confidence are declining, while Russia’s invasion of Ukraine and the associated sanctions are adding to the pressure.
With the outlook seeming rather bleak, the BoE may signal plans to slow down its tightening cycle for fear of choking off the economy.
As a result, traders are hesitant ahead of the decision.
Euro (EUR) Capped by Ukraine Crisis
However, the Euro (EUR) currently seems unable to capitalise on the Pound’s timidity. Poor Eurozone data and Ukraine crisis woes are weighing on EUR.
Earlier this morning, Germany’s latest factory orders showed a huge 4.7% contraction in March, far worse than the forecast 1.1% decline. The Russia-Ukraine war has hit Europe’s largest economy hard, causing particular problems for its manufacturing sector, which was already reeling from Covid.
Meanwhile, Russia’s attacks in Ukraine continue. Moscow has intensified its attacks on the Azovstal steel plant in Mariupol, one of the last places where Ukrainian forces are holding out in the region.
General Richard Dannatt, the former Chief of the General Staff of the British army, commented:
‘It would appear they’ve now resumed the direct attack in order to try and snuff out the remaining parts of the resistance, so that they can claim on Monday that they have captured Mariupol, and therefore they have completed their land corridor from Crimea through the Donbas into Russia proper.
‘This is a tragedy that’s unfolding in front of our eyes. Some of the civilians may get out over a two- or three-day ceasefire, which is being talked about, but for the soldiers in there, I’m afraid the prospect is very grim.’
In an additional gesture of aggression, Russia has practised simulated nuclear-capable missile strikes.
The latest developments suggest that Russia has no intention of seeking peace in Ukraine, and the devastating conflict will continue.
Pound Euro Exchange Rate Forecast: Sterling to Slip following BoE?
As mentioned, the BoE decision is the focus for today. We could see some volatility as markets react to the decision and then reposition.
If the BoE does announce plans to lift its foot off the brakes then the Pound Euro pair could slip lower. Similarly, if the bank wrongfoots markets by holding interest rates at 0.75% then Sterling will likely face selling pressure.