Pound Euro (GBP/EUR) Exchange Rate Strong as Markets Adjust Interest Rate Expectations
The Pound Euro (GBP/EUR) exchange rate has wavered slightly higher this morning, briefly hitting its highest level in over two weeks, as Sterling consolidates the week’s gains.
At the time of writing, the GBP/EUR exchange rate is trading at around €1.1510, close to its strongest level since the start of the month.
Pound (GBP) Stays Buoyed amid BoE Bets
The Pound (GBP) is finding support this morning, having staged a strong recovery over the course of the week.
A key factor underpinning the Pound’s success is speculation around Bank of England (BoE) monetary policy.
Earlier in the week, rate-setters at the BoE struck an unexpectedly hawkish tone when testifying in front of parliament’s Treasury committee. Since then, other events have seen markets revise their expectations for when the BoE will begin cutting interest rates.
Firstly, some of the tax cuts announced in the Chancellor’s Autumn Statement could potentially be inflationary. Secondly, the UK’s services PMI revealed an unexpected expansion in activity, with the data also containing signs of fresh inflationary pressures, due to strong wage growth.
Furthermore, BoE Chief Economist Huw Pill has said today in an interview with the Financial Times that it was too early for the bank to ‘declare victory’ over inflation.
BoE must hold firm in battle against inflation, says top official https://t.co/DhGh3plvqH
— FT for Schools (@ft4s) November 24, 2023
Pill added:
‘When I look at the prints of those indicators through the last few months, I see more evidence of sort of stubborn, high-level rates of inflation or growth that are stronger than we would really see as compatible with price stability, 2 per cent inflation, over the medium term.’
These comments are fuelling speculation that the BoE will cut rates later than expected, with markets now pricing in the first rate cut in late summer or early autumn next year, rather than May.
Euro (EUR) Muted amid Lacklustre German Data
Meanwhile, the Euro (EUR) is subdued this morning following some slightly disappointing German data.
Germany’s final GDP growth rate figures confirmed a 0.1% contraction in the third quarter, compared to the previous three months, putting the Eurozone’s largest economy on the brink of a recession. Meanwhile, the annual figure was revised lower, from -0.3% to -0.4%.
In addition, Germany’s Ifo business climate indicator for November missed forecasts, although it still showed an improvement and hit a four-month high.
Pound Euro Exchange Rate Forecast: Risk Appetite to Drive Movement?
At the time of writing, European Central Bank (ECB) President Christine Lagarde is delivering a speech, and her comments could begin to influence EUR as markets respond. If Lagarde strikes a dovish tone, the single currency could weaken further.
Looking ahead, a lack of economic data over the remainder of the session could leave the GBP/EUR exchange rate to trade on market risk dynamics.
A souring market mood could put pressure on the increasingly risk-sensitive Pound and boost the safer Euro, thereby denting GBP/EUR. However, if risk appetite improves then Sterling could push higher against the common currency.
Meanwhile, domestic UK news could drive movement in Pound. Any fresh commentary on the Autumn Statement, the British economy, or Bank of England policy expectations could prompt movement in Sterling.