Pound Euro (GBP/EUR) Exchange Rate Recovers as Markets Digest ECB Decision
(Updated 16:30, 21/7/22) The Pound Euro (GBP/EUR) exchange rate stabilised this afternoon, recovering from the two-week low hit earlier.
The Euro (EUR) initially spiked against the Pound (GBP) after the European Central Bank (ECB) raised interest rates by a larger-than-expected 50 basis points.
However, EUR couldn’t hold its gains. The larger rate rise, paired with the bank’s decision to stop giving forward guidance, suggests that the bank may believe it has a limited window in which to raise interest rates as recession risks continue to intensify.
If the Eurozone slips into a recession, the ECB will likely need to halt its tightening cycle. As such, the ECB may have been keen to hike rates while the option was available.
EUR investors also seemed rather unimpressed with the bank’s anti-fragmentation tool – the Transmission Protection Instrument (TPI). As a result, the single currency shed its gains, trading sideways overall.
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Pound Euro (GBP/EUR) Exchange Rate Tumbles after Hawkish ECB Surprise
(Updated 13:50, 21/7/22) The Pound Euro (GBP/EUR) exchange rate slumped after the European Central Bank (ECB) raised interest rates by 50 basis points. At the time of writing, GBP/EUR is trading at a two-week low of €1.1657, down 0.75% from this morning’s opening level.
We raised interest rates by 0.5%.
See our latest monetary policy decisions https://t.co/7arxAFKnmc pic.twitter.com/mCInj0jyaM
— European Central Bank (@ecb) July 21, 2022
There had been speculation that the ECB would opt for a 50-bp rate rise but the consensus among economists was that the bank would stick to a 25-bp hike, as it had signalled in recent weeks.
Therefore, the 0.5% rise was a hawkish surprise, sending the Euro (EUR) skyrocketing.
However, the ECB also softened its forward guidance. Rather than laying out expectations of more hikes to come, the bank said it would take a ‘meeting-by-meeting’ approach. This suggests that policymakers may be fearful of an impending recession, which may halt their tightening cycle.
Carsten Brzeski, Global Head of Macro at ING, commented on the decision:
‘A historic day for the European Central Bank. For the first time since 2011, the Bank has hiked interest rates and did so with a bang. Hiking rates by 50bp and softening forward guidance shows that the ECB thinks the window for a series of rate hikes is closing quickly…
‘This decision shows that the hawks must have got cold feet, fearing that the promised higher-than-25bp rate hike in September would be washed away by the looming recession…
‘Today’s decision conforms with our previous view that the ECB will not be able to deliver as many rate hikes over the next 12 months as markets had priced in after the June meeting.’
Other economists take a different view of the bank’s likely tightening cycle. Chris Beauchamp, Chief Market Analyst at IG Group, said:
‘The ECB has put new life into the euro with its surprise 50bps rate hike, and its strong words on its new crisis-fighting mechanism are designed to add to the sense that the central bank is serious about confronting the twin challenges that it faces.
‘The bank’s record on raising rates is hardly encouraging, but with inflation running so hot this is a clear statement of intent that has markets scrambling to price in a more hawkish policy in the months to come.’
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Pound Euro (GBP/EUR) Exchange Rate Falls ahead of ECB Meeting
The Pound Euro (GBP/EUR) exchange rate fell sharply this morning after the latest UK public finance figures rattled investors.
Meanwhile, the Euro (EUR) is enjoying a slight lift after gas flows through the Nord Stream 1 pipeline resumed today. However, a risk-off mood and hesitancy ahead of the European Central Bank (ECB) decision are limiting gains.
Pound Sterling (GBP) Slips as UK Public Borrowing Rises
Pound Sterling (GBP) stumbled this morning after the UK’s latest public sector borrowing data showed some dire results.
The government borrowed £22.88bn last month, far worse than the forecast £12.8bn, as surging inflation pushed debt interest payments to record levels.
The latest figures illustrate how inflation is hammering the UK’s public finances, as well as households and businesses. With the government in a worse fiscal position than many had anticipated, it will be harder for the next Prime Minister to use the public coffers to assist with the cost-of-living crisis.
UK racked up a record debt interest bill in June at £19.4 billion pounds, according to @ONS data out today.
Reflects soaring inflation which will result in bigger payouts from the government's index-linked bonds. pic.twitter.com/jNyRsVhQnD
— Andy Bruce (@BruceReuters) July 21, 2022
Danni Hewson, a financial analyst at AJ Bell, commented:
‘Families wondering why the government isn’t doing more to help them deal with their strained finances need to understand that the treasury’s fighting its own battle with inflation.
‘The debt interest paid out last month was the highest figure since records began in 1997 and with inflation still running hot things are only going to get more expensive particularly as some of that debt rolls over and refinancing is going be substantially more expensive.’
Meanwhile, Hoa Duong, an economist at PwC, argues that the UK Treasury must choose between tackling the deficit or the cost-of-living crisis:
‘This increasing deficit highlights the difficult balancing act facing the new chancellor of the exchequer. While tax cuts could ease business cost pressure and encourage growth, this could push up inflation, exacerbating the current pay squeeze. At present this means a choice between focusing on managing the deficit or tackling the cost of living rises, but not both.’
With more economic headwinds on the horizon, today’s figures are worrying GBP investors. As a result, Pound Sterling is facing selling pressure.
Euro (EUR) Muted ahead of ECB
Meanwhile, the Euro is somewhat muted today, which may be limiting its gains against the weakening Pound.
A resumption of Russian gas through the Nord Stream 1 pipeline into Germany is cheering investors somewhat, although this is offset by political chaos in Italy. The Italian coalition government is on the brink of collapse, with Prime Minister Mario Draghi expected to resign today.
EUR investors are also hesitant ahead of the ECB interest rate decision this afternoon. The bank has strongly signalled it will hike rates for the first time in over a decade today. However, there is some speculation over whether it will be a 25- or 50-bp rate rise.
In addition, markets are anxious to hear about the ECB’s new anti-fragmentation tool, although reports suggest it is not quite ready for deployment.
Understandably, EUR traders are holding back from placing aggressive bets in the run-up to the meeting.
Pound Euro Exchange Rate Forecast: ECB Decision to Cause Sharp Movement
This afternoon, we could see the ECB decision cause significant movement in the Pound Euro pair.
The ECB has been very clear in communicating its intentions over the last year, and policymakers have signalled that a quarter-percentage-point rate rise is on the way. Therefore, it’s unlikely that the bank will hike by half a percentage point, although not impossible. A 25-bp rise may see EUR stumble, while a 50-bp rise could see it soar.
Markets will also be paying close attention to the ECB’s forward guidance. If the bank now deems it necessary to move quickly to tame inflation, but doesn’t want to wrongfoot markets, it may opt for a 25-bp rise now and signal a 75-bp rise at the September meeting. This outcome could also boost the Euro against the Pound.
Finally, any news of the ECB’s anti-fragmentation tool could also impact the Pound Euro exchange rate. The tool is essential to ensuring financial stability in the Eurozone. As a result, if the tool is not yet ready, or economists deem it to be inadequate, the single currency could suffer.