Pound Euro (GBP/EUR) Exchange Rate Surges on Policy Divergence
(UPDATED 16/6/23, 16:30)
The Pound Euro (GBP/EUR) exchange rate is soaring this afternoon. Persistent inflation in the UK could see the Bank of England (BoE) continue its tightening cycle throughout the summer. Analysts at Rabobank commented on the situation:
‘Even though the BoE was among the first of the large central banks to engage in rate hikes, the UK’s persistent inflation means it will be among the last to complete its hiking cycle.’
Mounting speculation that the BoE will continue hiking after both the Federal Reserve and European Central Bank (ECB) have finished could be boosting the Pound.
At time of writing the GBP/EUR exchange rate is trading around €1.1728, a 0.42% jump from the morning’s opening levels.
Original article continues below…
GBP/EUR Exchange Rate Fluctuates as Inflation Expected to Cool to 6.1%
The Pound Euro exchange rate is rangebound as Eurozone inflation is expected to ease to the lowest level in 15 months.
At time of writing the GBP/EUR exchange rate is trading around €1.1680, relatively unchanged from the morning’s opening levels.
Euro (EUR) Supported by Hawkish ECB
The Euro (EUR) is trading fairly listlessly this morning. Yesterday, the ECB met expectations and hiked interest rates by a quarter point. Despite the rise being all but priced in, hawkish forward guidance is continuing to support the Euro today.
Inflation expectations were revised, and projections were adjusted to the upside. Predictions that inflation could remain stubbornly high through 2023 and 2024 could see the need for further tightening from the central bank. ECB President Christine Lagarde also added fuel to the fire of further tightening as she maintained her hawkish demeanour:
‘Bearing a material change to our baseline, it is very likely the case that we will continue to raise rates in July.’
Further supporting the Euro this morning was ECB policymaker and Bundesbank Chief Joachim Nagel. He cautioned of elevated inflationary risks:
‘Decisive monetary policy action is key to counteracting risks of more persistent inflation. Economy is set to recover only arduously but inflation at last is easing. (But) inflation risks are tilted to the upside.’
Pound (GBP) Propped up by Rate Hike Bets
Meanwhile, the Pound (GBP) was left to drift without a clear direction amid a lack of major economic data. Ensuring Sterling didn’t slip too far, elevated interest rate hike expectations could be keeping the Pound afloat.
As inflation remains stubbornly high at 8.7%, the markets are pricing in further tightening from the Bank of England (BoE). Recent hawkish comments have cheered GBP investors as they await the central bank’s latest interest rate decision next week. Laith Khalaf, Head of Investment Analysis at AJ Bell, comments that the decision won’t be an easy one:
‘The Bank is caught between a rock and a hard place, as it has to choose between pushing more mortgage borrowers towards the brink and letting inflation run riot.
‘The market is now firmly pricing in an interest rate rise at the Bank’s June meeting, and then four further hikes, taking us to 5.75%. Some more ugly inflation data could easily tip those expectations up to 6%.’
Pound Euro Forecast: Cooling Inflation to Temper Rate Hike Bets from ECB?
Looking ahead to next week, the Pound Euro exchange rate could see further movement if the final reading for the Eurozone headline CPI confirms that inflation had fallen to 6.1% in May. It would be the lowest level for 15 months as energy prices finally started to recede. Despite this, core inflation is expected to remain sticky amid a strong labour market and increasing wage pressures.
Meanwhile, the Pound will have to continue trading on rate hike bets amid a lack of economic data to close the week out. Turning to next week, both the inflation rate and BoE interest rate decision will be keenly watched. Headline CPI inflation is only expected to modestly cool to 8.4%, far above the target rate of 2%. As for the rate decision, the markets have all but priced in another 25bps rise, but GBP investors will look for clues beyond the June meeting.