Pound Euro (GBP/EUR) Exchange Rate Trades on Central Bank Dynamics
The Pound Euro (GBP/EUR) exchange rate fluctuated last week as markets contemplated the likely forward action of the Bank of England (BoE) and European Central Bank (ECB). On Thursday, the BoE hiked interest rates by 25bps: but the raise failed to significantly boost GBP/EUR and the exchange rate closed the week with losses.
At the time of writing, GBP/EUR is trading at €1.1360, marginally higher than this morning’s opening levels.
Pound (GBP) Buoyed by High UK Inflation
The Pound (GBP) traded in a mixed range last week, climbing on BoE rate hike bets but hampered by disappointing PMI data.
At the beginning of the week, a meeting of the world’s top central banks lent support to GBP, as bank leaders endeavoured to curb panic in the banking sector.
Nevertheless, suspicions that the Bank of England may put interest rates on hold triggered bearish sentiment on Tuesday: moreover, data revealing the highest government borrowing levels on record for the month of February dampened morale.
Sterling enjoyed support midweek against several peers, although it weakened against the Euro (EUR). Inflation in the UK exceeded expectations for the year to February, increasing the chances of an interest rate hike from the BoE. Experts predicted the release would print at 9.9%, but the headline figure printed at 10.4%.
Into Thursday, the UK central bank hiked interest rates by 25bps as expected, boosting GBP/EUR. The BoE indicated that the quarter-point raise may be its last if inflation weakens as expected, though commented:
‘[I]f there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.’
At the end of the week, Sterling traded sideways against the Euro, beleaguered by the UK’s latest PMI releases. While an impressive retail sales report helped boost the Pound initially, a contraction in March’s manufacturing activity dented GBP sentiment while expansion likewise slowed in the UK’s service sector.
Euro (EUR) Firms as ECB Strikes Hawkish Tone
The Euro enjoyed tailwinds through last week’s session, bolstered by upbeat comments from the European Central Bank.
Apparent stabilisation of the European banking sector helped support the single currency at the beginning of the week: heads of the BoE, ECB, Bank of Japan (BoJ), Federal Reserve and Bank of Canada (BoC) came together to increase US Dollar (USD) liquidity.
On Tuesday, Germany’s ZEW economic sentiment index printed below expectations, but the Euro was able to shrug off headwinds. High investor morale enabled EUR to climb despite downbeat comments:
ZEW President Achim Wambach observed: ‘The assessment of the earnings development of banks has deteriorated considerably, although it still remains slightly positive.’
On Wednesday, hawkish comments from several ECB policymakers inspired further EUR strength. Spanish central bank head Pablo Hernandez de Cos defended both the Spanish and European banking system, while Lagarde said that inflation remains too high and the Bundesbank’s Joachim Nagel insisted that the fight against inflation was not over.
A drop in US Dollar exchange rates on Thursday following the Fed’s dovish rate hike decision the evening before helped boost the Euro, given the currencies’ strong negative correlation. At the end of the week, mixed PMI data may have prevented a sharper upturn in EUR exchange rates, but the single currency was nonetheless able to resist significant headwinds.
Pound Euro Forecast: End-of-Week Data to Govern Exchange Rate?
Through the course of the coming week, the Pound Euro exchange rate is likely trade on upcoming data releases, including Monday’s German business climate indicator and the European economic sentiment report on Thursday.
Potentially the most significant market-movers, however, will be inflation readings for Germany and the Eurozone, which will likely influence the policy stance of the European Central Bank. Inflation in both Germany and the wider Euro area is expected to have weakened in March, potentially inspiring dovishness among ECB policymakers.
Elsewhere, employment data from the bloc could affect EUR exchange rates alongside central bank speeches from Isabel Schnabel and Andrea Enria. In the UK, distributive trades data and BoE comments may drive Sterling movement.