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GBP/EUR Exchange Rate Drops on Uncertainty about BoE’s Interest Rate Outlook

February 9, 2018 - Written by Ben Hughes

On Thursday’s trading session, the Pound to Euro exchange rate saw an overall advance from 1.1314 to a higher rate of 1.1365 in the evening.

This closing figure was not the best daily rate, however – at the height of trading, the GBP/EUR exchange rate hit a high of 1.1442.

Trader Concerns about BoE Interest Rate Decision Bring GBP/EUR Exchange Rate Losses

The Pound to Euro exchange rate has still been affected by Thursday’s Bank of England (BoE) monetary policy meeting, which saw the BoE leave interest rates at 0.50%.

Policymakers were perceived to have been hawkish on monetary policy, having upgraded GDP growth estimates for 2018 and 2019.

BoE officials also stressed that they were more inclined to act on above-target inflation, which has been so since the start of 2017.

Although this hasn’t guaranteed higher interest rates in the near-term, some economists have gone so far as to predict a BoE interest rate hike as early as May 2018.

Commenting on the matter, BoE Governor Mark Carney said;

‘In order to bring it (inflation) back to target over a more conventional horizon which means moving it in from that three year horizon that it will be necessary, likely to be necessary, to raise interest rates to a limited degree in a gradual process but somewhat earlier and to a somewhat greater extent than we thought in November’.

Problematically, however, Mr Carney has also focused on the importance of Brexit negotiations in the bank’s current outlook, saying;

‘The most important decisions by orders of magnitude that will be taken that affect UK households and businesses and collective prospects for years to come are not going to be taken in Threadneedle Street.

But they’ll be taken elsewhere as part of the negotiations this year’.

If Brexit talks appear to be going poorly then the BoE may hold off on implementing higher interest rates, thereby frustrating traders who have been anticipating such a policy move.

EUR/GBP Rate Rises despite Potential Eurozone Integration Clash

The Euro has firmed against the Pound today, despite background concerns about the future of Eurozone integration projects.

Presenting mixed signals on the matter, French Finance Minister Bruno Le Maire has stated;

‘Now is the time to act. Let’s not wait two or three years. Let’s not wait for another economic crisis before we agree on the things we need’.

Mr Le Maire has however taken issue with German plans that could lead to those buying sovereign debt incurring long-term losses, saying;

‘I believe in policies and democracies and responsibility of elected governments. I can guarantee you, you would be handing a gift to extremists’.

Mr Le Maire has nonetheless remained optimistic about overall integration talks, stating;

’Technical difficulties should not impede political progress. I’m ready to reinforce the reduction of risk. It’s a question of political will’.

GBP/EUR Exchange Rate Forecast: GBP Volatility Ahead on UK Inflation Rate Data

The coming week is also set to see Pound to Euro volatility, as high-impact UK inflation rate figures are due out.

The inflation stats are due on 13th February and are expected to show a minor slowdown in year-on-year inflation.

If the reading does dip from 3% to 2.9% as expected, the Pound could fall in value.

This is because, in light of Mark Carney’s recent remarks, lower inflation would reduce the chances of the BoE considering a near-term interest rate hike.

If inflation starts to fall naturally then the BoE is under little pressure to intervene and raise interest rates.

On the other hand, however, higher inflation will increase the chances of a near-term interest rate hike and could lead to Pound to Euro gains.

For Euro traders, it will be worth watching out for German and Eurozone-wide inflation and GDP stats out on 14th February.

In most cases, estimates are for lower inflation and slowing levels of GDP growth, which could contribute to a Euro to Pound exchange rate decline.
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