Pound Euro (GBP/EUR) exchange rate volatile following dovish BoE sentiment

Pound Euro (GBP/EUR) exchange rate fluctuates following BoE’s dovish tilt

The Pound Euro (GBP/EUR) exchange rate is changeable this morning as mixed central bank commentary injects volatility into the currency pairing.

At the time of writing the GBP/EUR exchange rate is trading at around €1.1713, virtually unchanged from this morning’s opening rate.

Pound (GBP) Volatile following BoE Rate Hold

The Pound (GBP) is moving without a clear direction against most of its major peers this morning as markets continue to digest the UK’s latest monetary policy update.

Yesterday the Bank of England (BoE) held interest rates at a sixteen year high of 5.25% for a fourth consecutive month.

While two out of nine BoE rate-setters voted for a 25bp hike, Governor Andrew Bailey’s dovish pivot signalled that the central bank is almost certainly looking towards rate cuts in the coming months, having removed its hiking bias. Markets continue to bet on rate cuts in the summer months, leaving Sterling on the defensive today.

Kallum Pickering, senior economist at Berenberg Bank commented on the BoE’s decision:

‘This opens the door for rate cuts soon as long as inflation heads lower at a pace roughly in line with the BoE’s updated forecast. On the news, money markets continued to expect five 25bp cuts in 2024 with a first cut in Q2 – market participants are split on whether the first cut will come in May or June.’

Euro (EUR) buoyed by hawkish ECB sentiment

The Euro (EUR) is fluctuating this morning amid a lack of fresh economic data.

Despite yesterday’s inflation data reporting a 2.8% cooling as forecast, senior voices of the European Central Bank continue to advocate a ‘higher for longer’ stance regarding interest rates, serving to keep the common currency afloat today.

ECB President Christine Lagarde is amongst those striking hawkish, negating market speculations that rate cuts could occur as soon as April this year. In the wake of yesterday’s marginal cooling of Eurozone inflation, Lagarde’s restrictive rhetoric appears to buoy EUR into today’s session by continually pushing back against ECB rate cuts.

Maeva Cousin, economist at Bloomberg Economics, commented:

‘Chances are this judgment is delayed until June, giving hawks the space needed to push the first rate cut until then.’

Pound Euro exchange rate forecast: Germany’s trade balance to knock EUR?

Looking ahead, on Monday next week the latest German trade data is due for release. A forecast narrowing in Germany’s trade surplus to 17 billion may serve to underwhelm EUR investors, amid signs that the export-heavy German economy continues to face a weak start to the year.

Further pressuring the Euro on Monday will likely be the finalised services PMI print. A downwardly revised contraction to 48.4 in January could see the common currency falter, reinforcing concerns that the vital services sector continues to deteriorate.

The finalised services PMI is also due out in the UK on Monday. While the preliminary data reported a better-than-forecast expansion in the UK’s services sector, confirmation of such growth may lend GBP some support.

As this week nears an end, both Eurozone and UK data are in short supply. This will likely leave the Pound Euro exchange rate to trade on market sentiment, with any downbeat trade potentially lifting the safe-haven Euro.

Yasmine Arasteh

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