Pound Euro (GBP/EUR) Exchange Rate Surges as ECB Decision Sparks Volatility
(Updated 15:30, 9/6/22) After tumbling to a near one-month low, the Pound Euro (GBP/EUR) exchange rate surged by over a cent as markets responded to the European Central Bank’s (ECB) rate decision and subsequent commentary.
The Euro (EUR) initially jumped following the ECB decision. The bank indicated that it could raise interest rates by 75 basis points over the next two meetings, thereby supporting the single currency.
However, the ECB also downgraded its growth forecasts. The bank now sees GDP growing by 2.8% in 2022, rather than 3.7%, and 2.1% in 2023, rather than 2.8%. The ECB’s policy approach also continues to lag behind other central banks around the world, despite inflation surging to comparable levels.
Meanwhile, questions remain on whether the Eurozone economy is strong enough to withstand tighter monetary policy. Richard Flax, Chief Investment Officer at Moneyfarm, commented:
‘The key question remains whether now is the right time to begin to tighten monetary policy, given the prospect of an economic slowdown.
‘Fears of a bloc-wide recession and the high debt levels of some member states may possibly temper the ECB’s appetite to aggressively hike interest rates. A sharp slowdown could force the ECB to take their foot off the tightening pedal before the end of the year’.
In addition, the decision has widened the yield spread across Eurozone countries’ government bonds.
Italian vs German 10-year spread the widest since May 2020 pic.twitter.com/cqlI7uX7xx
— Jonathan Ferro (@FerroTV) June 9, 2022
This is fuelling fears of fragmentation as Eurozone countries could be affected differently by a tightening of monetary policy.
After slumping to €1.1649, GBP/EUR spiked to €1.1768. At the time of writing the Pound Euro pair is retreating from today’s highs, and more volatility may be on the way. The ECB’s approach will impact the Euro significantly over the coming months.
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Pound Euro (GBP/EUR) Exchange Rate Plunges following ECB Decision
(Updated 13:45, 9/6/22) The Pound Euro (GBP/EUR) exchange rate slumped this afternoon as the European Central Bank (ECB) struck a hawkish tone following its latest interest rate decision.
The ECB signalled that it would raise interest rates by 25 basis points in July, as expected. However, the bank also indicated that a larger rate increase could be coming in September.
In a statement following the decision, the ECB said:
‘Looking further ahead, the Governing Council expects to raise the key ECB interest rates again in September. The calibration of this rate increase will depend on the updated medium-term inflation outlook.
‘If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting.’
This is a marked departure from the bank’s previously dovish approach and came as somewhat of a surprise to markets.
The Euro (EUR) is surging across the board as markets begin to price in a rate increase of 75 bps by September.
GBP/EUR tumbled to a near one-month low following the meeting, where it seems to have met resistance. The Pound Euro exchange rate is currently trading at around €1.165, down over half a cent from today’s high.
ECB President Christine Lagarde is now taking questions during the post-decision press conference. Could her comments temper the market?
— European Central Bank (@ecb) June 9, 2022
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Pound Euro (GBP/EUR) Exchange Rate Subdued as ECB Meeting Looms
The Pound Euro (GBP/EUR) exchange rate could struggle this morning as investors await the European Central Bank’s (ECB) interest rate decision.
Markets expect the bank to signal rate hikes in July and September, narrowing the policy gap between the ECB and the Bank of England (BoE), which could weigh on the Pound (GBP).
In the meantime, downwardly revised UK growth forecasts could be hurting Sterling.
Pound (GBP) Pressured by Downbeat Economic Outlook
GBP traders are jittery this morning as storm clouds continue to gather over the UK economy.
Last night, the British Chambers of Commerce (BCC) downgraded its expectations for UK GDP growth and business investment.
Surging inflation, increased uncertainty, rising taxes and weakening consumer spending are all darkening the country’s economic outlook.
Alex Veitch, Director of Policy at the BCC, commented:
‘Our latest forecast indicates that the headwinds facing the UK economy show little sign of reducing with continued inflationary pressures and sluggish growth… The forecast drop in business investment is especially concerning.
‘With inflation forecast to race ahead of wages, we are concerned about a dip in consumer spending which would further impact businesses and hamper growth. We forecast that if trends continue, inflation will only return to the Bank of England’s target rate at the end of 2024, implying a prolonged period of difficulty for the UK.’
This dire warning comes shortly after the Organisation for Economic Co-operation and Development (OECD) cut growth forecasts. The OECB warned yesterday that the UK economy could stall next year.
Euro (EUR) Muted ahead of ECB Decision
Meanwhile, the Euro (EUR) may find its gains limited this morning due to its negative correlation with the US Dollar (USD). A risk-off market mood is boosting the safe-haven Dollar, thereby weighing on the single currency.
In addition, EUR investors may be hesitant ahead of the ECB decision later this afternoon.
Following yesterday’s strong upward revision to Eurozone GDP growth, markets are pricing in more hawkish action from the ECB. While the bank almost certainly won’t raise rates today, policymakers are expected to signal hikes coming in July and September.
However, markets are unsure just how steep these rate rises could be. Therefore, EUR traders might prefer to sit on the sidelines ahead of the meeting.
Pound Euro Exchange Rate Forecast: ECB Decision to Hurt GBP/EUR?
The Pound Euro pair will likely be dominated today by the ECB decision.
If the ECB signals policy lift-off in July – as is expected – then the single currency could rise against Sterling.
That said, July and September rate rises are already broadly priced into the GBP/EUR exchange rate.
Investors may be more focused on any clues as to how much the ECB could hike by. Following the strong GDP results yesterday, some analysts expect a 50-bps rate rise in either July or September. Other experts believe the ECB will be far more cautious, as it has been over the last year.
Either way, we could see a flurry of movement around the ECB decision, leading to potential volatility in GBP/EUR.
Overall, however, the Pound could lose more ground against the Euro.