GBP/EUR Climbs on Sterling Tailwinds
(Updated 14:15, 14/12/23) The Pound Euro exchange rate trended sharply up against the Euro following the Bank of England (BoE)’s interest rate decision, in which policymakers voted by 6-to-3 to keep rates on hold.
The fact that 3 of the 9-strong monetary policy committee deemed the economy strong enough to withstand another hike gave cheer to GBP investors, despite the overall decision of a hold. The latest UK GDP data had triggered concerns earlier in the week that the domestic economy may not be as resilient as previously thought.
Meanwhile, the European Central Bank (ECB) also held interest rates, at 4.5%. The Euro climbed against several peers as policymakers expressed their determination to keep borrowing costs at ‘sufficiently restrictive levels for as long as necessary’.
Yet gains may have been tempered by remarks from ECB President Christine Lagarde which were a little less forthright than usual owing to her compromised state of health.
Lagarde pragmatically observed that risks to economic growth are skewed to the downside, while inflationary risks include geopolitical tensions.
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Pound Euro (GBP/EUR) Exchange Rate Experiences Rocky Trade Ahead of Bank Decisions
The Pound Euro (GBP/EUR) exchange rate is seesawing this morning ahead of interest rate decisions from both the Bank of England (BoE) and the European Central Bank (ECB). Investors are braced for insights on the economic trajectory of both the UK and the Eurozone.
At the time of writing, GBP/EUR is trading at €1.1599, with little change from opening levels.
Pound (GBP) Gains Support amid Bullish Expectations
The Pound (GBP) is strengthening against a couple of its peers today, though sinks in other exchange rates amid uncertainty over the BoE’s forward guidance. Investors are hoping the bank will maintain its hawkish tone, although yesterday’s weak GDP data could rock the boat.
The US Federal Reserve bank was unexpectedly dovish in its commentary yesterday, lending support to Sterling as the BoE appears more hawkish by comparison. Yet UK economists and politicians are increasingly concerned that the central bank’s higher-for-longer interest rate strategy could dent economic growth.
Imogen Pattison, assistant economist at Capital Economics, explains the tension between higher interest and knock-on economic effects:
‘If we are right to think the Bank of England will keep interest rates at their peak for longer than investors anticipate and that unemployment will rise next year, the current downward trend in mortgage rates won’t continue.’
The Pound will likely move more decisively in either direction following the Bank of England’s decision at midday, and the implications of policymakers’ commentary.
Euro (EUR) Gains Fuelled by USD Weakness
The Euro (EUR) is benefiting this morning from a slump in US Dollar (USD) exchange rates following a dovish commentary last night from the Federal Reserve.
As expected, the Fed kept interest rates on hold at 5.5% – but Chairman Jerome Powell unexpectedly signalled an end to the hiking cycle. Powell also revealed that 17 of the 19 policymakers project rate cuts in 2024.
Given the strong negative correlation between USD and the single currency, subsequent headwinds in ‘Greenback’ exchange rates are boosting the Euro.
Gains are capped however, by traders’ trepidation ahead of the ECB’s own interest rate decision. The central bank is expected to leave the door open for further rate hikes if inflationary pressures remain strong; yet as in the UK, stuttering economic growth may inspire dovish comments.
Analysts at BHH securities assess the situation:
‘President Lagarde will most likely use her press conference to try to push back against the dovish narrative. However, we note that her October conference was quite downbeat, and the growth outlook has gotten worse since then.’
GBP/EUR Forecast: Interest Rate Decisions in Focus
Ahead of today’s central bank decisions, it’s hard to predict the near-term trajectory of the Pound Euro exchange rate. A hawkish tone from either the BoE or the ECB would likely inspire tailwinds for the respective currency, while dovish comments could subdue trading.
Either are a possibility, as both the UK and the bloc’s economies have experienced recent volatility due to domestic price pressures; and yet policymakers have largely defended restrictive policy measures. As the session progresses, GBP/EUR may trade in a wide range, with investors weighing the approach of the two banks against one another.