Pound Euro (GBP/EUR) Exchange Rate Regains Ground on Reduced ECB Rate Rise Bets

Pound Euro (GBP/EUR) Exchange Rate Strengthens following German Inflation

(Updated 14:30, 29/11/22) After a volatile morning, the Pound Euro (GBP/EUR) exchange rate regained the upside this afternoon. The movement came after Germany’s preliminary inflation rate reading came in lower than expected ahead of the Eurozone CPI tomorrow.

German inflation eased from 10.4% (downwardly revised from 10.6%) in October to 10% in November. Economists had expected it to print at 10.4% this month.

With inflation seeming to ease in Europe’s largest economy, it looks increasingly likely that the European Central Bank (ECB) will raise interest rates by 50bps at its next meeting, rather than 75bps.

As a result, investors are scaling back their bets for further aggressive rate hikes, which in turn is weighing on the Euro (EUR).

Meanwhile, a fairly risk-positive tone in markets has been supporting the Pound (GBP) over the safer single currency.

Original article continues below:

Pound Euro (GBP/EUR) Exchange Rate Spikes and Slips as Risk Appetite Shifts

The Pound Euro (GBP/EUR) exchange rate traded erratically this morning, initially spiking before falling back down, as European markets jumped at the open before stabilising.

At the time of writing, GBP/EUR is trading at around €1.1577, marginally higher from today’s opening level but down from an earlier high of almost €1.1613.

Pound (GBP) Volatile amid Changing Market Mood

The Pound (GBP) leapt higher as today’s European session began, with the increasingly risk-sensitive UK currency enjoying a revival of risk appetite.

Recently, Covid protests in China caused anxiety in markets. But overnight this angst was replaced with optimism as Beijing clamped down on demonstrations while also announcing fresh economic stimulus measures and plans to speed up its vaccination programme.

When European markets opened this morning, equities – often an indicator of risk appetite – jumped higher. However, they have since retreated, with the less optimistic mood causing Sterling to shed its gains.

In addition, the latest UK mortgage data shows a sharp drop in approvals and the lowest value of lending in almost a year. The figures are the latest sign that the UK housing market is cooling as the UK economy slips into recession.

With the market mood still looking mixed, Sterling is trading without a clear direction. However, the downbeat mortgage data may keep a lid on GBP movement.

Euro (EUR) Mixed as Economic Sentiment Recovers but Remains Low

Meanwhile, the safer Euro (EUR) recouped its earlier losses as the initial risk-on tone faded and traders became a little more cautious.

In addition, a slightly better-than-forecast recovery in Eurozone economic sentiment may have lent EUR some support. The indicator rose from 92.5 to 93.7, above expectations of 93.5.

However, the reading remains close to a two-year low as businesses and households endure higher interest rates, surging prices and a looming Eurozone recession.

As a result, any upside in the Euro seems limited, and we may see GBP/EUR continue to fluctuate in the near term.

Pound Euro Exchange Rate Forecast: Central Bank Policy Expectations in Focus

Looking ahead, a speech from Bank of England (BoE) policymaker Catherine Mann could affect GBP exchange rates this afternoon. With UK inflation still elevated but the country now in a recession, the BoE faces difficult decisions.

If Mann advocates for more steep interest rate rises, Sterling could strengthen. However, the Pound may come under pressure if she expresses concerns about the UK’s economic outlook.

BoE Governor Andrew Bailey is also due to speak later as he faces the House of Lords Economic Affairs Committee. Again, any hawkish hints could boost GBP.

At the same time, EUR investors will be paying close attention to Germany’s preliminary inflation rate reading for November. Markets may use the report as a gauge for tomorrow’s Eurozone CPI. If German inflation cools, as expected, it could suggest inflation in the wider bloc will also ease, which in turn could dent European Central Bank (ECB) interest rate rise bets and thereby weigh on EUR.

Samuel Birnie

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