Pound Euro (GBP/EUR) Exchange Rate Zigzags Higher as Markets Price in More UK Rate Hikes
(Updated 13:55, 06/07/23) The Pound Euro (GBP/EUR) exchange rate struck a 17-day high earlier today as expectations of more policy tightening from the Bank of England (BoE) boosted the Pound (GBP).
GBP investors seemed to shrug off concerns of a ‘hard landing’, as the BoE risks hiking the UK economy into a recession. Instead, traders bet on Sterling in anticipation of rising interest rates.
UK government bond yields – which often indicate BoE bets and boost the Pound – surged today. The ten-year gilt yield hit its highest level in 15 years.
However, GBP/EUR saw some volatility and found its gains limited. The Euro (EUR) initially benefitted from strong German factory data, while a firmly risk-off market mood lent the safer single currency some support.
At the time of writing, the Pound Euro exchange rate is trading at €1.1717, up modestly on the day but down from an earlier high of €1.1735.
Original article continues below:
Pound Euro (GBP/EUR) Exchange Rate Buoyed by Rate Hike Bets
The Pound Euro (GBP/EUR) exchange rate has fluctuated this morning, slipping before rebounding to a 16-day high, as central bank policy divergence supports the currency pairing.
At the time of writing, GBP/EUR is trading at around €1.1719, close to its highest levels since 20 June.
Pound (GBP) Strong amid BoE Speculation
The Pound (GBP) is holding strong against the Euro (EUR) this morning, regaining ground after an initial decline to trade at a 16-day high.
The strength in Sterling comes as expectations of more Bank of England (BoE) interest rate rises lift the UK currency.
British inflation remains stubbornly high, having cooled less than other economies in recent months. As a result, economists expect the BoE to push ahead with aggressive interest rate rises. After a 50bps hike last month, markets are pricing in the possibility of another bumper increase in August.
While this is providing the Pound with support, recession worries are capping the upside. Analysts believe that the BoE may choose to hike the UK into a recession to bring inflation back down to its 2% target.
Euro (EUR) Fails to Sustain Upside
Meanwhile, the Euro received a boost at the start of today’s session after German factory orders smashed forecasts.
Industrial orders rose 6.4% in May – the largest rise since June 2020 and well above expectations of 1.2% growth. This sign of health in the Eurozone’s largest economy cheered EUR investors.
However, this wasn’t enough to provide the Euro with a sustained upside, and the single currency quickly relinquished its gains.
Troubling PMI data published yesterday may be creating lingering headwinds for EUR.
In addition, policy divergence between the BoE and the European Central Bank (ECB) may be weighing on the Euro. While the ECB is expected to raise rates this month, there is some speculation that it could be the bank’s final rate hike of the current tightening cycle.
Pound Euro Exchange Rate Forecast: Sterling to Cede Ground?
Coming up, the Eurozone’s latest retail sales report could provide the Euro with some much-needed support. Economists expect a modest 0.2% recovery in sales in May. Could this data release exceed forecasts, as the German factory orders did?
Meanwhile, risk appetite could impact the currency pairing. If the current bearish market mood persists, the increasingly risk-sensitive Pound could weaken against the safer Euro.
US data later in the session could affect risk sentiment. Signs of a strong US economy and tight labour market could boost Federal Reserve interest rate hike bets, which in turn would likely sour the market mood.