Pound Euro (GBP/EUR) Exchange Rate Rebounds but Stays Near Four-Month Lows
(Updated 16:10, 2/2/23) The Pound Euro (GBP/EUR) exchange rate slumped earlier, hitting a four-month low of €1.1164, following the Bank of England (BoE) interest rate decision. After the European Central Bank (ECB) also delivered its decision, GBP/EUR was able to rebound. However it remains near multi-month lows at around €1.1235.
The weakened state of the Pound (GBP) comes as the BoE signalled a more dovish approach moving forward. Although the bank raised rates by 50bps, as expected, it signalled that future rate increases were not guaranteed and that they would likely be in smaller increments.
Meanwhile, the ECB also enacted a half-point hike and effectively committed itself to another such move at the bank’s March meeting.
These events were broadly in line with what markets had anticipated, and the narrowing gap of policy divergence had already been mostly priced in to the Pound Euro pair.
However, the ECB’s communications suggested that its rate of tightening may slow after the March meeting. In addition, ECB President Christine Lagarde failed to commit to more half-point hikes in the meetings succeeding next month’s decision.
This, along with some profit-taking, saw the single currency trim its gains. However, GBP/EUR remains more than 1% down on the week.
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Pound Euro (GBP/EUR) Exchange Rate Slides as Central Bank Decisions Drive Movement
This morning, the Pound Euro (GBP/EUR) exchange rate slipped to its lowest level since late September, when Sterling slumped following Liz Truss’s disastrous mini budget. The pair is currently trading around €1.1215, having shed two cents this week.
Markets are bracing for the upcoming interest rate decisions from the Bank of England (BoE) and the European Central Bank (ECB), which could both spark significant volatility this afternoon.
Euro (EUR) Enjoys Post-Fed Gains ahead of ECB
The Euro (EUR) made strong gains against the Pound (GBP) overnight, with the single currency enjoying its negative trading correlation with the US Dollar (USD).
USD exchange rates nosedived following the Federal Reserve’s interest rate decision yesterday evening. The Fed opted for a mere quarter-point rise, signalling a slowdown in its hiking cycle. The subsequent selloff fuelled the Euro.
This morning, EUR has extended its upside ahead of the ECB decision. The bank is likely to hike rates by another 50bps, and markets expect it to signal at least one more half-point hike in the coming months.
However, Eurozone inflation continues to rapidly cool while some policymakers are reportedly pushing for a more dovish approach. This may prompt caution among EUR traders today, potentially limiting further gains for the Euro ahead of the ECB meeting.
Pound (GBP) Weakens as Markets Expect BoE Slowdown
Meanwhile, the Pound has fallen to multi-month lows against the Euro as markets expect a comparatively dovish approach from the Bank of England.
Although the BoE is also likely to raise rates by 50bps, there are some doubts. At the bank’s last meeting, two policymakers voted to leave rates unchanged. Could these officials convince some of their colleagues to enact a smaller 25bps hike?
Even if the BoE does hike by half a percentage point, there is speculation that it may signal that the end of its hiking cycle is in sight. Such forward guidance could hammer the Pound.
Understandably, GBP traders are cautious this morning. Investors are unwilling to back the Pound against the Euro, considering the expected policy outcomes from the BoE and ECB meetings.
Pound Euro Exchange Rate Forecast: GBP/EUR to Slump Further?
The BoE meeting concludes at noon today, with the ECB decision coming just over an hour later. Both announcements could cause significant volatility as markets respond and reprice the currencies accordingly.
If both meetings go as expected, with the ECB signalling further hikes and the BoE hinting at a slowdown, GBP/EUR could fall further.
Sterling might find its downside cushioned somewhat if the Bank of England outlines more optimistic expectations for the UK economy.