GBP EUR Exchange Rate Under Pressure Ahead of BoE Rate Decision

November 2, 2017 - Written by Frank Davies

STORY LINK GBP EUR Exchange Rate Under Pressure Ahead of BoE Rate Decision

With markets jittery ahead of the much-anticipated Bank of England (BoE) interest rate decision the Pound Euro exchange rate remained on a weaker footing.

Investors have already largely priced in the impact of a 25bpt rate hike, limiting the upside potential of Sterling in the near term.

However, further volatility is expected once the Monetary Policy Committee (MPC) announces its decision and publishes the latest quarterly Inflation Report.

As the Spanish and Italian manufacturing PMIs bettered expectations to strengthen further on the month in October this helped to shore up the Euro, meanwhile.

Continued signs of resilience amongst Eurozone member economies encouraged demand for the single currency, even though this is unlikely to be enough to alter the current policy outlook of the European Central Bank (ECB).

Pound Set for Volatility as BoE Policy Outlook Becomes Clear

The GBP EUR exchange rate could return to a stronger footing if the BoE takes a generally more hawkish tone today.

If dissent amongst policymakers proves more minimal than expected this could offer encouragement to the Pound, increasing the odds of this being the start of a fresh monetary tightening cycle rather than a one-off hike.

Even so, given the mixed nature of recent UK data the wisdom of an immediate rate hike still seems debatable.

As Jane Foley, Senior FX Strategist, commented:

‘This sharp swing in expectations is almost entirely the result of the step up in hawkish rhetoric proffered by the MPC rather than a response to UK economic data. Indeed, while UK CPI inflation has edged up to 3%, activity series are showing signs of weakening. The implication is that for many forecasters, the expectations of a rate rise on November 2 is not necessarily consistent with what they think the Bank should do, but rather what the MPC now looks likely to do.

‘To protect its credibility, we do now expect that the Bank will hike rates in November. However, due to weakness in recent economic data, we anticipate that the Bank will not be able to follow on with another move for some time. The dovish hike scenario suggests that upside potential for the Pound on a policy move in November is likely to be limited.’

Should the MPC surprise markets by remaining on hold this could see Sterling slump sharply across the board, losing much of the support it has enjoyed in recent weeks.

However, if Friday’s UK services PMI betters expectations in line with the corresponding manufacturing and construction measures this could offer the Pound another rallying point ahead of the weekend.

EUR Exchange Rates Supported as Eurozone Growth Continues

The solid nature of October’s raft of Eurozone manufacturing PMIs could keep the single currency on a stronger footing in the short term, encouraging confidence in the domestic outlook.

Signs continue to point towards robust growth within the currency union, as Chris Williamson, Chief Business Economist at IHS Markit, noted:

‘Eurozone factories started the fourth quarter with increased vigour, with the sector’s growth spurt showing no sign of abating.

‘October’s PMI was the highest since February 2011 and the second-highest in over 17 years. The overall performance of the manufacturing sector so far this year has been the strongest since 2000.

‘It’s especially encouraging to see employment growing at a survey-record pace as firms seek to boost capacity in response to fuller order books. Export order growth remains encouragingly solid, suggesting little impact from the strengthening of the Euro this year, and domestic demand continues to improve across the region.’

As the odds of Catalonia successfully breaking away from Spain have continued to dwindle the Euro has benefitted, with the sense of political uncertainty easing.

Even with members of the former Catalan government summoned before the Spanish courts, to face possible charges of rebellion and sedition, tensions appear to have eased, at least somewhat.

This has helped to reduce the downside vulnerability of EUR exchange rates over the course of the week, encouraging investors to buy back into the single currency.

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TAGS: Pound Euro Forecasts