Pound Euro Exchange Rate Rises as Markets Brace for BoE Rate Hike

Pound Euro (GBP/EUR) Exchange Rate Firms ahead of BoE Decision

The Pound Euro (GBP/EUR) exchange rate jumped higher this morning as markets anticipate hawkish action from the Bank of England (BoE) at its upcoming interest rate decision.

At the time of writing, GBP/EUR is trading at €1.1459, up 0.3% from this morning’s low of €1.1425.

Pound (GBP) Rises amid BoE Rate Rise Bets

The Pound (GBP) strengthened as today’s European session began as investors gear up for another rate rise from the Bank of England.

Markets see a 90% probability of a 75-bp interest rate rise from the BoE, following moves of the same size from the European Central Bank (ECB) two weeks ago and the Federal Reserve last night. These expectations seem to be lifting Sterling today.

However, many economists believe the bank will opt for a smaller increase. Kallum Pickering, Senior Economist at Berenberg, commented:

‘While 75bp is far from inconceivable, 50bp remains more likely, in our view. Remember, in addition to raising rates, the BoE looks set to announce the start of active selling gilts as part of its quantitative tightening policy.

‘As financial conditions are already tightening as benchmark rates edge ever higher, we believe the BoE will wait to see the impact of active QT before deciding on whether to steepen the trajectory of rate hikes.’

As a result of this uncertainty, Sterling’s upside seems rather limited.

Euro (EUR) Resists Further Losses as Russia Stays in Spotlight

Meanwhile, the Euro (EUR) is putting up a fight as it tries to shrug off worries about the escalating conflict in Ukraine.

Yesterday, Vladimir Putin declared a partial military mobilisation, allowing Russia to call on reserve combatants to bolster its invading army. Putin also delivered a bellicose speech, including a threat to use nuclear weapons. This saw the Euro slump.

Today, however, analysts have somewhat soothed fears. According to military experts, Putin is unlikely to use nuclear weapons and military reserves will not be combat ready for at least a few months.

In addition, the move to mobilise is politically risky. Russian citizens have protested the unpopular decision, leading to around 1,300 demonstrators being arrested by riot police. Putin’s position is looking increasingly precarious.

A sharp pullback in the US Dollar (USD) is also providing EUR with some support, thanks to the currencies’ negative correlation.

These factors may be limiting EUR’s losses against GBP.

Pound Euro Exchange Rate Forecast: BoE Decision in the Spotlight

Looking ahead, the Bank of England interest rate decision is in focus. If policymakers do opt for a steeper move of 75 basis points it could provide the ailing Pound with some support. However, with a UK recession looming, any upside in the Pound may be limited. If the BoE raises rates by just 50 bps, Sterling could stumble.

GBP investors will also be eager to know whether the BoE’s outlook for the UK economy has changed since Liz Truss announced her energy support package. If the BoE believes the UK will be in a stronger position thanks to Truss’s plans then Sterling could gain ground. However, the government has not yet costed its energy bill intervention, so the BoE may be hesitant to speculate on its impact.

As for the Euro, news from Ukraine will likely continue to drive movement. Later this afternoon, a forecast fall in Eurozone consumer confidence could put pressure on the single currency.

Samuel Birnie

Contact Samuel Birnie


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