Pound Euro (GBP/EUR) Exchange Rate Underpinned by Expected BoE-ECB Divergence
(Updated 13:50, 26/07/23) The Pound Euro (GBP/EUR) exchange rate has wavered today, with the currency pairing threatening to climb to a 12-day high, despite a cautious market mood.
The strength in the Pound (GBP) seems to be coming from expected policy divergence between the Bank of England (BoE) and the European Central Bank (ECB).
The ECB meets tomorrow to set monetary policy. While markets have priced in a 25bps hike, some analysts expect more dovish forward guidance from the bank.
Meanwhile, the BoE policy decision next week could see the British central bank signal more rate hikes to come. A 25bps hike from the BoE is likely, though there is the outside chance of a larger 50bps move.
While inflation in the Eurozone has eased rapidly in recent months, UK inflation is far stickier. As a result, traders seem to be betting that the BoE will take a more hawkish stance than its European counterpart.
However, a bearish market mood is keeping pressure on the riskier Pound, preventing it from posting notable gains against the safer Euro (EUR).
At the time of writing, GBP/EUR is trading at €1.1664, having slipped from an earlier daily high of €1.1672.
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Pound Euro (GBP/EUR) Exchange Rate Softens as Risk Appetite Fades
The Pound Euro (GBP/EUR) exchange rate is trending lower this morning, after hitting an 11-day high yesterday evening, as a lack of economic data leaves the pairing vulnerable to a souring market mood.
At the time of writing, GBP/EUR is trading at around €1.1655, marginally lower than last night’s high of €1.1673.
Pound (GBP) Edges Lower amid Risk-Off Mood
The Pound (GBP) is pulling back this morning, trimming some of yesterday’s gains, as the market mood clouds over ahead of the Federal Reserve interest rate decision.
As investors grow cautious due to the risk of a more hawkish outlook from the US central bank, the increasingly risk-sensitive Pound is struggling to attract support.
The gloomier mood also comes amid a lack of UK economic data, which leaves Sterling further exposed to risk sentiment.
Euro (EUR) Muted Ahead of Fed and ECB
Meanwhile, the safer Euro (EUR) is firming against the Pound, although its upside seems limited.
The looming Fed decision is not only dampening the market mood but it also seems to be muting EUR’s movement, due to the Euro’s strong negative correlation with the US Dollar (USD). With tonight’s policy announcement potentially having a notable impact on the common currency, EUR investors seem hesitant to place any aggressive bets.
Furthermore, the European Central Bank (ECB) will announce its own policy decision tomorrow afternoon. While the ECB is likely to raise rates by 25bps, investors can only guess at the tone it will take in its forward guidance.
This uncertainty is limiting the single currency’s movement today.
Pound Euro Exchange Rate Forecast: Fed Decision to Spark Volatility?
Looking ahead, risk appetite could continue to drive movement today amid a lack of data drivers. If the current bearish market mood persists, Sterling could continue to trend lower against the safer Euro.
However, movement could be limited as currency investors refrain from repositioning too drastically ahead of the interest rate decisions from the Federal Reserve and the ECB.
First up is the Fed decision this evening, which could impact the Pound Euro pair. A 25bps hike from the US central bank is largely priced in, meaning the Fed’s policy outlook is set to have the biggest impact on the currency markets.
If the Federal Reserve signals that it is nearing the end of its tightening cycle, the US Dollar could slump. As EUR shares a negative correlation with USD, this could see the single currency gain ground against Sterling.
On the other hand, some analysts believe the Fed will strike a more hawkish tone than anticipated. Such a result could see USD rally, with the subsequent weakness in EUR potentially supporting the Pound Euro pair.
A hawkish surprise from the Fed would also likely sour the market mood, which could cap the riskier Pound’s gains.