Pound Euro (GBP/EUR) Exchange Rate Plunges after BoE and ECB Decisions
(Updated: 16:00, 15/12/22) The Pound Euro (GBP/EUR) exchange rate tumbled this afternoon after the Bank of England (BoE) and European Central Bank (ECB) interest rate decisions. Although both banks raised interest rates by 50bps, the ECB’s forward guidance was far more hawkish.
In its monetary policy statement, the ECB said that policymakers expected to raise interest rates ‘significantly further’ in the coming months to bring down inflation, despite signs that inflation has already peaked. Meanwhile, the BoE said ‘further increases in Bank Rate may be required’, suggesting that the UK central bank could be close to its terminal rate.
In addition, two of the BoE’s nine-strong Monetary Policy Committee (MPC) surprised analysts by voting to leave interest rates unchanged this meeting. This indicates that the MPC as a whole is starting to shift towards significantly slowing or pausing its tightening cycle.
This divergence in approaches has seen the Pound Euro pair slump. At the time of writing, GBP/EUR has dropped from a high of €1.1635 to €1.1476, a fall of over 1.3%.
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Pound Euro (GBP/EUR) Exchange Rate Falls as Anxious Markets Await Interest Rate Decisions
The Pound Euro (GBP/EUR) exchange rate fell sharply as today’s European session began, dropping from €1.1635 to €1.1584, a fall of over 0.4%. However, it has since bounced back to €1.1610.
The downside comes as an anxious market mood weighs on the riskier Pound (GBP) over the safer (Euro). Looking ahead, the Eurozone and UK central bank decisions are in focus.
Pound (GBP) Slips as Market Mood Sours
The Pound is on the back foot this morning as a risk-off mood in markets weighs on the UK currency.
One key factor driving risk aversion today is the Federal Reserve’s interest rate decision last night. Although the Fed raised interest rates by 50bps – a slowdown from previous 75bps hikes – it signalled that further increases are on the way.
The Fed also upwardly revised its interest rate projects. In other words, although the US central bank is slowing its pace of rate increases, it expects to raise rates higher overall.
This has stoked fears of a deeper global economic downturn, as higher US interest rates can slow economic growth around the world.
As a result, a risk-off tone is characterising trade this morning, and this is weighing on GBP/EUR.
Euro (EUR) Rises amid Risk-Off Trade
Meanwhile, the Euro is enjoying safe-haven flows today amid the gloomy market mood.
The single currency’s negative trading relationship with the US Dollar (USD) may be limiting EUR’s gains, however, as USD continues to enjoy post-Fed tailwinds.
EUR investors are now looking ahead to the European Central Bank (ECB) interest rate decision, which follows the Bank of England (BoE) decision at noon. Although both banks are likely to raise interest rates by half a percentage point, the relative health of the Eurozone economy compared to the UK, which is in recession, could also be lifting EUR.
Pound Euro Exchange Rate Forecast: BoE and ECB Decisions to Rock GBP/EUR?
The BoE and ECB interest rate decisions are the focus for today, with each event likely to cause significant movement.
First up is the BoE decision. The British central bank is likely to slow its pace of policy tightening as the UK economy falls deeper into recession. A 50bps hike is already largely priced in, so investors will be more interested to hear how the BoE expects to act in 2023. If policymakers suggest they will keep raising rates, GBP could firm. However, if they signal plans to further slow or even pause their hiking cycle, Sterling could slide.
Likewise, the ECB is set to deliver a half-point hike. While the Eurozone economy looks stronger than the UK’s, inflation in the bloc is showing clearer signs of easing. If the ECB surprises with a dovish quarter-point rise of 25bps, or hints that it may take a more cautious approach moving forward, the common currency could shed its gains against the Pound.