Pound euro (GBP/EUR) exchange rate ticks up as ECB discusses future rate cuts

Pound euro (GBP/EUR) exchange rate firms as ECB discusses future rate cuts

Article updated 16:30, 17/5/2024:

The pound euro (GBP/EUR) exchange rate is firming this afternoon, following further dovish remarks from the European Central Bank (ECB).

In a speech, ECB policymaker Isabel Schnabel cautioned against back to back interest rate cuts. However, as she strongly implied that a June rate cut was occuring, the euro (EUR) began to edge lower against its peers.

Schnabel commented:

‘Depending on the incoming data and our new Eurosystem staff projections, a rate cut in June may be appropriate. But the path beyond June is much more uncertain. Recent data have confirmed that the last mile of disinflation is the most difficult.’

At the time of writing, GBP/EUR is trading at around €1.1688, an increase of roughly 0.2% from today’s morning rates.

Original article continues below:

Pound euro exchange rate narrows amid dovish ECB remarks

The pound euro exchange rate is wavering this morning, amid dovish remarks from European Central Bank Vice President Luis de Guindos.

At the time of writing, GBP/EUR is trading at around €1.1664, showing little movement from Friday’s opening rates.

Euro (EUR) undermined by dovish ECB remarks

The euro (EUR) is seeing its appeal limited this morning by dovish remarks from ECB Vice President Luis de Guindos.

In a speech, de Guindos discussed the ECB’s increased confidence that inflation was sustainably cooling. He offered predictions that headline levels would reach the central bank’s 2% remit in 2025.

He stated that:

‘Headline inflation is there at 2.4%, core inflation below 3%. We believe that in the coming months inflation will fluctuate around these values. In the medium term, in the year 2025, we will be moving in a stable way towards our price stability objective which is 2%.’

As the ECB is widely expected to begin cutting interest rates in June, de Guindos’ words served to pressure EUR.

By adding further fire to the existing narrative, they may be prompting investors to increase their expectations of this incoming cut.

However, a risk averse market mood may be serving to cushion the euro from steeper losses this morning. As a safer currency, EUR is remaining afloat against assets such as the Australian dollar (AUD), despite increasing rate cut bets.

Pound (GBP) mixed amid lack of data

The pound (GBP) is trading in a mixed capacity this morning, as an absence of data leaves it exposed to market dynamics.

As an increasingly risk-sensitive currency, the sombre tinge to the morning’s trade is applying some selling pressure.

However, as investors have little in the way of data catalysts, Sterling is unable to find a clear direction.

Bank of England (BoE) interest rate cut bets may also be adding additional pressure to GBP this morning. Recent communication from the BoE has been somewhat hawkish, with policymakers advocating for unchanged rates.

Yesterday, BoE policymaker Megan Greene commented:

‘In considering for how long we must retain our restrictive stance before policy should be eased, I think the burden of proof therefore needs to lie in inflation persistence continuing to wane.’

Pound euro exchange rate forecast: Central bank speeches in focus

Looking ahead for the pound, the main driver of movement could be a speech from BoE Deputy Governor Ben Broadbent.

If Broadbent advocates for keeping interest rates unchanged for longer, the pound could strengthen against its peers. However, if he adopts a more neutral, or dovish, standpoint the pound may weaken.

This is followed on Tuesday by a speech from BoE Governor Andrew Bailey. If Bailey continues his recent neutral viewpoint on interest rates, GBP may soften against its peers.

For the euro, the core catalyst of movement is likely to be a speech from ECB President Christine Lagarde on Tuesday.

If President Lagarde maintains a dovish outlook, the common currency could weaken against its peers.

As the ECB is widely expected by markets to begin cutting interest rates in June, any discussion of this may weigh on EUR.

John Mulcahey

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