Pound Euro (GBP/EUR) Exchange Rate Slips as ECB Rate Rise Bets Pick Up
The Pound Euro (GBP/EUR) exchange rate declined on Thursday morning, trimming Wednesday’s gains, as a risk-off mood swept markets and attention turned from the Bank of England (BoE) to the European Central Bank (ECB).
At the time of writing, GBP/EUR is trading at around €1.1391, a fall of almost 0.4% from this morning’s opening rate.
Euro (EUR) Firms on Hawkish ECB Comments
The Euro (EUR) has strengthened today as markets increased their expectations for ongoing interest rate rises from the ECB.
Earlier this week, rumours that the bank would slow its pace of policy tightening had dented the Euro. Yesterday’s inflation rate reading further fuelled these expectations, as it confirmed a sharp slowdown last month.
However, hawkish comments from ECB officials today have given the single currency a boost. Earlier this morning, ECB Governing Council member Klaas Knot said that the bank ‘is planning to hike by 50bps multiple times’.
Echoing Knot’s views, ECB President Christine Lagarde told delegates at the World Economic Forum (WEF) in Davos that the bank was committed to keeping down inflation and that it will ‘stay the course’ with rate hikes.
These hawkish signals helped the Euro regain some lost ground against the Pound (GBP). However, EUR still remained far below Tuesday’s levels against GBP.
Pound (GBP) Cushioned by BoE Rate Hike Bets
Meanwhile, the Pound slipped as Thursday’s trade got underway, with the risk-sensitive UK currency succumbing to a risk-off market mood. Market sentiment soured following dire US sales data on Wednesday evening, which triggered anxiety about the health of the world’s largest economy.
Amid the lack of UK economic data today, this risk-off mood seems to be keeping the Pound on the back foot against the safer Euro.
However, Sterling is avoiding heavier losses thanks to the recent uptick in BoE rate hike expectations. Following stronger-than-expected wage growth and yesterday’s double-digit inflation reading, markets are betting on a 50bps increase at the bank’s February meeting. This is underpinning Sterling today.
Pound Euro Exchange Rate Forecast: Sterling to Remain Subdued?
Looking ahead, the ECB’s meeting minutes from December could have an impact on the Euro. If they reveal a strong appetite for multiple 50bps interest rate rises then they could boost EUR exchange rates. However, as Lagarde’s recent comments are more up to date, any movement may be muted.
UK economic data remains thin on the ground. As a result, the increasingly risk-sensitive Pound may be driven by market sentiment. If the mood remains gloomy, Sterling could continue to slip against the safer single currency.
Turning to tomorrow’s trade, UK retail sales early in the morning could provide fresh impetus for the Pound Euro pair. Economists expect a 0.5% recovery in UK domestic sales during the important Christmas period, following a surprise 0.4% decline in November.
If the data prints as expected, it could give GBP a lift. However, another unexpectedly weak reading could trigger a GBP/EUR selloff.