Pound Euro Exchange Rate News: GBP/EUR Softens Ahead of ECB Policy Meeting

June 9, 2022 - Written by John Cameron

STORY LINK Pound Euro Exchange Rate News: GBP/EUR Softens Ahead of ECB Policy Meeting

The Euro (EUR) Buoyed ahead of ECB Decision

The Euro (EUR) is gathering momentum today ahead of the European Central Bank’s (ECB) policy meeting later today.

The ECB is still expected to stay the course and leave interest rates on hold this month.

The focus will instead be on ECB President Christine Lagarde, as she outlines the bank’s plans for future rate hikes.

Market experts are expecting the ECB to begin their first rate-hike of the cycle following its July policy meeting, in line with Lagarde’s guidance:

‘The first-rate hike, informed by the ECB’s forward guidance on the interest rates, will take place sometime after (June). We have not yet precisely defined the notion of ‘some time,’ but I have been very clear that this could mean a period of only a few weeks.’

A key focus for EUR investors will be on how aggressively the ECB plans to hike rates, any hints that the bank might pursue a 50 basis point hike could propel the Euro sharply higher.

Boosting investor’s spirits, and keeping the Euro strong ahead of the meeting, was the upbeat Eurozone GDP data printing yesterday at a better-than-expected quarterly rise of 0.6%, higher than the forecasts of 0.3%.

Capping any further gains for the Euro is the continued Russian invasion of Ukraine and the ever-rising fossil fuel and commodity prices, pushing the inflation rate above 8% in the Eurozone. Despite the current positivity surrounding the ECB policy outlook, a worsening economic landscape still looms, likely to weigh on the Euro amid a souring market mood.

Pound (GBP) Muted amid Downbeat Market Mood

The Pound (GBP) is softening against the Euro today as mounting pressures of political and economic concerns weigh heavy on sterling.

With the cost of filling up an average car hitting £100 for the first time, the cost-of-living squeeze is set to worsen. The British Chambers of Commerce has warned that UK economic growth will ‘grind to a halt’ and inflation could likely hit double figures before the year is through.

The group have since slashed their 2022 growth forecast from 3.6% to 3.5% and the stark assessment follows a warning from the OECD (Organisation for Economic Co-operation and Development) that the UK’s growth next year will be worse out of all the G20 countries aside from Russia, unless immediate action is taken. Alex Veitch, the OECD Director of Policy says:

‘The headwinds facing the UK economy show little sign of reducing. The war in Ukraine came just as the UK was beginning a COVID recovery, placing a further squeeze on business profitability, the forecast drop in business investment is especially concerning.

‘It is vital that urgent action is taken here, and we are having constructive conversations with the government about its review of capital allowances and other policies to incentivise business investment.’

GBP/EUR Exchange Rate Forecast: Hawkish ECB to Weigh Further on the Pound?

Looking ahead, all eyes will be on the ECB policy meeting where the central bank will likely stay on course and hint further at the first rate-hike in July. If the market forecasts are accurate, the Euro could strengthen.

Meanwhile, as the Bank of England (BoE) continues its path of gradual monetary policy tightening, analysts at Commerzbank warn that the central bank is likely to act less aggressively than expected:

‘The Pound should suffer increasingly from this. Moreover, the Euro should benefit from the ECB's interest rate hikes from the summer onward. We, therefore, see (GBP/EUR lower) until the end of the year.’

With data thin on the ground for the Pound, market movements will likely be influenced by the continuing political and economic uncertainty gripping the country.

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TAGS: Pound Euro Forecasts