Pound euro (GBP/EUR) exchange rate edges lower following hawkish ECB rate cut

Pound euro (GBP/EUR) exchange rate softens amid hawkish ECB rate cut

Article updated 15:53, 6/6/2024:

The pound euro (GBP/EUR) exchange rate is ticking lower this afternoon, following the European Central Bank’s (ECB) latest interest rate decision.

While the ECB cut rates by 25bps as markets expected, it reiterated a data driven approach to future decisions. Furthermore, it refused to commit to a clear pathway for monetary policy loosening.

The ECB’s accompanying report stated:

‘The Governing Council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction. In particular, its interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. The Governing Council is not pre-committing to a particular rate path.’

As the timing of the next rate cut is now up in the air, the euro is gaining ground. The central bank’s monetary policy is likely to remain restrictive, but the additional breathing room could allow the Eurozone’s economy to revitalise somewhat.

At the time of writing, GBP/EUR is trading at around €1.1742, a fall of roughly 0.2% from today’s morning rates.

Original article continues below:

Pound euro exchange rate muted ahead of ECB rate decision

The pound euro exchange rate is treading water today, as markets anticipate the first interest rate cut from the European Central Bank.

At the time of writing, GBP/EUR is trading at around €1.1757, showing little movement from the morning’s opening rates.

Euro (EUR) quiet ahead of ECB decision

The euro (EUR) is wavering this morning, as markets anticipate the latest interest rate decision from the European Central Bank.

The central bank is widely expected by markets to cut interest rates for the first time today, from 4.5% down to 4.25%. However, the path forward is more up in the air – investors appear uncertain about whether or not this rate cut will be joined by another in July.

Fabio Balboni, an economist at HSBC, commented that:

‘Further cuts in September and December remain our central case. But if the recent resilience in services inflation proves sustained, we see increasing chances that the ECB might have to be more cautious on the way down.’

If this is to be a single rate cut, the ECB could offer hawkish forward guidance. The 25bps reduction would likely keep monetary policy at restrictive levels, which may be needed amid signs of persistent inflation.

However, cutting today would lead to a divergence of policy between the ECB and Federal Reserve. This could weaken the euro later in the session, as the Fed is unlikely to cut rates until later in the year.

Pound (GBP) tepid amid lack of UK data

The pound (GBP) is continuing its recent run of flat trade this morning, as impactful data releases remain hard to come by.

This is leaving Sterling exposed to the market mood, which is allowing it to remain cushioned against its peers. Owing to the pound’s increasingly risk-sensitive nature, this morning’s gently upbeat tone is prompting some support.

However, due to the continued lack of data, GBP is unable to press the advantage against most major peers.

Later in the session, Sterling may be able to gain a foothold against the euro in the wake of the latest ECB rate decision.

A rate cut would prompt divergence between the ECB and the Bank of England (BoE), as the latter is not expected to cut rates until August.

Pound euro exchange rate forecast: German data to lift EUR?

Beyond today’s main event, a duo of German data releases could provide direction for the euro tomorrow.

Firstly, the latest batch of German trade data is due to print. Economists forecast the trade surplus to have increased in April, rising to €22.6 billion,  due to improving exports.

Additionally, German industrial production is forecast to have improved by 0.2% in April. Both sets of data could lift the euro by showing that the Eurozone’s largest economy is continuing to recover.

Then, ECB President Christine Lagarde is due to deliver a speech. Depending on how today’s forward guidance manifests, she is likely to follow suit. Hawkish sentiments may strengthen EUR.

For the pound, the week is set to close without any impactful data releases. As such, Sterling may struggle to trade beyond a narrow range of movement.

John Mulcahey

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