Pound to Euro (GBP/EUR) Exchange Rate Crashes in Wake of BoE Decision

May 5, 2022 - Written by John Cameron

STORY LINK Pound to Euro (GBP/EUR) Exchange Rate Crashes in Wake of BoE Decision

GBP/EUR Exchange Rate Dives on Bearish Pound Sentiment

The Pound Euro (GBP/EUR) exchange rate is plummeting at present, having peaked briefly this morning as German data disappointed. Meanwhile, Pound (GBP) traders are hesitant to place bullish bets in the aftermath of the Bank of England (BoE)’s interest rate decision.

At the time of writing, GBP/EUR is trading at €1.1772, down 0.9% from today’s opening levels.

Pound (GBP) Faces Multiple Headwinds Following BoE Decision

The Pound is weakening against its peers so far today, as the Bank of England hikes interest rates hike by 25bps. This brings rates to their highest level since the 2008 financial crisis, despite mounting concerns that the economy is weakening on account of the UK’s cost-of-living crisis.

The increase has failed to inspire Sterling upside, given policy divergence with the Federal Reserve : the US central bank hiked rates by 0.5% yesterday and warned of more 50bps rate hikes going forwards.

Further denting GBP sentiment are risk-off headwinds concerning both international and domestic politics.

The war in Ukraine continues to cap gains for risk-on currencies, as Russian troops were reported to have entered the Azovstal steelworks in Mariupol yesterday. Despite alleged agreements to implement a three-day ceasefire today, Russian forces have apparently resumed their offensive on Mariupol and are engaged in ‘difficult bloody battles’ against Ukrainian fighters.

Meanwhile, local elections foreshadow potential volatility ahead, as today’s results may determine whether the Conservative party decides to stick with Boris Johnson as its leader. Last night, YouGov published some new polling looking at what might happen in 16 key English councils:

‘Overall, the story is fairly consistent – we expect swings of varying sizes from the Conservatives to Labour in all areas, and also some notable improvements for the Greens and independent/smaller party candidates.
However, the Conservative vote seems to be holding up better in some areas of England than others.’

Euro (EUR) Rises despite Weaker-Than-Expected Data Releases

The Euro (EUR) has managed to firm against the majority of its peers today despite weak German data and wavering risk sentiment.

German factory orders dropped by 4.7% in March, well below the 1.1% expected and a second consecutive decline. Analysts blame the war in Ukraine, supply constraints and soaring energy prices, all of which hurt foreign demand and investment: orders from abroad decreased 6.7%, especially those from countries outside the Euro Area, and domestic orders dropped 1.8%.

Meanwhile, German construction activity contracted in April to 46.0 – below the 50.2 anticipated. Construction in the wider Euro area also expanded at a lower pace than expected, as the PMI printed at 50.4 rather than the 51.5 forecast.

Global risk sentiment has been variable throughout the morning, turning bearish on the latest news from Ukraine, as well as ongoing Covid restrictions in China: the country’s services sector suffered its second-worst contraction since the onset of the coronavirus pandemic in April 2022, as lockdowns restricted growth and mobility.

However, brief risk-on flows and a more hawkish narrative from the European Central Bank (ECB) continue to buoy EUR sentiment. Finland's central bank head and ECB Governing Council Member Olli Rehn said in an interview with Daily Helsingin Sanomat on Thursday that it would be reasonable to expect a 25bps rate hike in July, and for interest rates to reach zero in the Autumn.

'After that we could continue further normalising monetary policy gradually and proactively,' Rehn said.

GBP/EUR Exchange Rate Forecast: BoE Decision to Drive Further Movement?

Looking ahead, the Bank of England’s decision to hike rates by 25bps today may continue to affect Sterling exchange rates as investors digest the news.

If BoE Governor Andrew Bailey strikes a dovish tone in his press conference, GBP may trend lower against its peers – meanwhile, a lack of EU data exposes the single currency to potential losses ahead.

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TAGS: Pound Euro Forecasts