Pound Euro (GBP/EUR) Exchange Rate Remains Flat as Hawkish/Dovish Split in ECB Widens
(Article updated 15:54, 20/4/23) The Pound Euro (GBP/EUR) exchange rate is remaining narrow this afternoon, as an increasing split in perspective amongst European Central Bank (ECB) policymakers weighs on EUR.
The latest ECB meeting minutes released earlier today. While these indicated agreement with the 50bps hike they delivered, there was a growing voice of concern over further tigthening.
Carsten Brezski, Global Head of Macro at ING, highlighted this:
‘There seems to be a growing divergence between ECB members favouring the view that “in the past, the effect of monetary policy had been continually overestimated, which might happen again”.’
Furthermore, the persistent mixed market mood appeared to prevent either side of the pairing from gaining much momentum.
At the time of writing, GBP/EUR is trading at around €1.1348, remaining relatively static against the morning’s opening rates.
Original article continues below:
Pound Euro Exchange Rate Rangebound amid Souring Market Mood
The Pound Euro exchange rate is trading in narrow boundaries this morning, as a souring market mood negates elevated rate hike bets.
At the time of writing, GBP/EUR is trading at around €1.1342, showing little movement from the morning’s open rates.
Pound (GBP) Underpinned by Increased Rate Hike Bets
The Pound (GBP) is being underpinned during the morning session by continued rate hike bets. Following on from yesterday’s inflation data, GBP investors are expecting at least one additional 25bps hike in May.
Beyond this is also under contention. Some economists expect additional hikes, bringing the terminal rate to 5%. However, this is likely to remain data dependant.
Anna Titareva, UBS Economist, commented:
‘We now expect the BoE to deliver one more 25bp rate hike in May, bringing Bank Rate to 4.5% with the policy rate decisions after that remaining highly data dependent on the labour market and inflation data.’
However, the current sour market mood is keeping Sterling capped. As the Pound holds an increasingly risk-sensitive nature, it is more susceptible to these shifts in mood.
Euro (EUR) Capped by Sharp Cooldown in German PPI
The Euro (EUR) is seeing potential gains capped this morning, following a significant cooldown in German producer price inflation.
Printing at -2.6%, the sharp cooldown may be placing a lid on further bets on rate hikes from the European Central Bank (ECB).
However, ECB Governing Council member Klaas Knot commented that it was ‘too early to talk about a pause’.
In an interview, Knot further explained his stance:
‘Mildly restrictive territory will not be enough to counter an underlying inflation rate that has been creeping up towards 6%. We need a sufficiently restrictive stance. Where is sufficiently restrictive, I don’t know, but clearly not where we are today.’
As such, further rate hikes are likely on the table. This perception may be preventing the Euro from falling further.
Furthermore, the market mood is downbeat this morning which may bring some safe-haven flows to the common currency.
GBP/EUR Exchange Rate Forecast: UK Retail Slump to Dent GBP?
Looking ahead for the Pound, tomorrow sees the publication of March’s retail sales data. Economists have forecast a decline on a monthly basis of 0.5%, which could dent Sterling by indicating weakness in the sector.
Later, the latest private sector PMI flashes are due to print. April’s activity is forecast to read as broadly positive, with the service sector expected to hold at 52.9.
If these print in line with expectations, Sterling could strengthen as resilience in the economy points to room for further rate hikes.
For the Euro, tomorrow sees the release of a series of PMI flashes. Economic activity in the Eurozone’s private sector is expected to show more of a mixed picture.
While services is expected to remain in growth, a modest slowdown is expected. For the manufacturing index, a decrease in contraction is forecast. However, as this still points to economic resilience, EUR could rally on increased rate hike bets.