Pound Euro (GBP/EUR) Fluctuates as Rate Hike Bets Provide Modest Support
(Updated 2/6/23, 16:45)
The Pound Euro (GBP/EUR) exchange rate remains trading in a narrow range to close the week. Stronger-than-expected US labour market data soured the market mood modestly, weighing on the Euro. However, concerns over the Bank of England’s (BoE) monetary policy appear to be sapping demand for Sterling. Economists at Commerzbank warn of the central bank’s hesitancy:
‘The door remains open for further rate hikes, but the BoE is likely to hope that the upcoming data releases will give it room to pause. The financial markets apparently do not share the BoE’s optimistic view. The terminal rate is now seen at 5.5%. This seems excessive in view of the BoE’s hesitant stance.
‘GBP weakness will probably continue next year as well, as the BoE is likely to cut its key rate in view of the weak economy and somewhat lower inflation.’
At time of writing, the GBP/EUR exchange rate is around €1.1624, relatively unchanged from this morning’s opening levels.
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GBP/EUR Wavers amid Risk-Positive Sentiment
The Pound Euro exchange rate is trading narrowly amid an upbeat market mood and elevated rate hike expectations.
At time of writing, the GBP/EUR exchange rate is around €1.1635, relatively unchanged from this morning’s opening levels.
Euro (EUR) Underpinned by Hawkish ECB
The Euro (EUR) is struggling for increased demand this morning after a sharper-than-expected slowdown in Eurozone inflation yesterday.
Despite headline CPI printing below expectations, European Central Bank (ECB) President Christine Lagarde reassured investors that the central bank still has a way to go before inflation is under control. Speaking at an event in Hamburg, Lagarde appeared hawkish and reiterated the central bank’s mission to rein in inflation:
‘Today, inflation is too high and it is set to remain so for too long. We are determined to bring it back down to our 2% medium-term target in a timely manner.
‘That is why we have hiked rates at our fastest pace ever – and we have made clear that we still have ground to cover to bring interest rates to sufficiently restrictive levels.’
Elsewhere, with the US Senate passing the bill to raise the debt limit, global market sentiment was buoyed. All that now stands in the way of the bill passing is a signature from President Joe Biden, avoiding the US to default on their debts. In the wake of the announcement, a risk-positive mood saw the US Dollar slide, and the Euro climb. The negative correlation the latter shares with the ‘Greenback’ could see the Euro remain supported.
Pound (GBP) Supported by Elevated Rate Hike Bets
Meanwhile, the Pound (GBP) remains fairly quiet amid a thin trading calendar. The upbeat market mood has seen Sterling moderately supported, along with interest rate hike expectations.
With inflation remaining far above the central bank’s target rate of 2%, expectations for further tightening could be keeping Sterling afloat. Echoing these sentiments was investment firm Goldman Sachs in a note to their clients. The investment group believe that the Bank of England (BoE) will surpass the Federal Reserve and raise interest rates to a 15-year high. Goldman Sachs said:
‘Our analysis agrees with recent BoE estimates that high headline inflation has been the primary driver of strong wage growth—as workers bargain to regain their level of real income prior to the war in Ukraine.
‘While the BoE has been reluctant to hike further, we believe that persistent inflationary pressures will push the MPC towards more tightening.’
Pound Euro Exchange Rate Forecast: Stronger US Dollar to Sour the Euro?
Looking ahead, the Pound Euro exchange rate could see further movement despite a lack of economic data for either pairing. The negative correlation the Euro shares with the US Dollar (USD) could see the former slide in the wake of the latest US labour market data. If employment reports reveal strong job and wage growth, interest rate hike bets could be bolstered from the Federal Reserve. Further prospects of rate hikes could buoy the US Dollar, and in turn, weigh on the Euro.
Meanwhile, the Pound will be heading into the weekend clinging onto modest gains of elevated rate hike bets. A thin trading calendar could see Sterling exposed to market sentiment, a maintained risk-positive market mood could keep the Pound supported.