Pound Euro Exchange Rate News: GBP/EUR Drops Sharply after Expected BoE Rate Decision

June 16, 2022 - Written by John Cameron

STORY LINK Pound Euro Exchange Rate News: GBP/EUR Drops Sharply after Expected BoE Rate Decision

Pound (GBP) Drops Sharply as BoE Announce 25bps Rate Hike

The Pound (GBP) is sliding further today after the Bank of England (BoE) announced an expected 25bps interest rate hike today, bringing its main rate to 1.25%, the highest in 13 years.

With a unanimous 9-0 vote on a rate hike, the nine-member Monetary Policy Committee (MPC) voted 6-3 for a 25bps rise, with three policymakers calling for a larger 50bps increase. The interest rate now sits at its highest since January 2009.

Accompanying the interest rate decision, the BoE expressed that the path for interest rates had risen significantly since the last meeting in May, and was adamant that it will strive to bring inflation down:

‘The MPC will take the actions necessary to return inflation to the 2% target sustainably in the medium term, in line with its remit. The scale, pace and timing of any further increases in Bank Rate will reflect the Committee’s assessment of the economic outlook and inflationary pressures.

The Committee will be particularly alert to indications of more persistent inflationary pressures, and will, if necessary, act forcefully in response.’

Elsewhere, the fallout of ‘partygate’ continues to weigh on the Prime Minister, and in turn the Pound, as ethics adviser Lord Geidt announces his resignation. After admitting that Boris Johnson may have broken the ministerial code, Geidt becomes the second ethics adviser to resign from Johnson’s government in less than two years.

In his resignation letter, Lord Geidt said:

‘This week, however, I was tasked to offer a view about the government’s intention to consider measures which risk a deliberate and purposeful breach of the ministerial code. This request has placed me in an impossible and odious position.’

Euro (EUR) Softens amid Risk-Aversion Trade

The Euro (EUR) remains subdued today as risk sentiment soured the global markets as the European Central Bank (ECB) failed to reassure investors over growing concerns of fragmentation in Eurozone bonds. To quell growing fears, ECB Vice President Luis de Guindos addressed the media:

‘Markets should not doubt how determined we are to address fragmentation. Fragmentation has always been a concern for the ECB.

‘Inflation is very high, more persistent, and broad-based than we thought some months ago. We intend to raise rates by 0.25% in July.’

Providing a potential boost for the Euro is the emergence of news out of Ukraine that Russia is ready for peace talks with Ukraine, according to the Russian Chief Negotiator. Until a response is received from Ukraine however, the pressures from the ongoing conflict will still weigh on the Euro amid growing energy security fears.

Arriving in Kyiv on a symbolic trip of unified support for Ukraine was German Chancellor Olaf Scholz, French President Emmanuel Macron, and Italian Prime Minister Mario Draghi. Macron said:

‘It’s an important moment. It’s a message of unity we’re sending to the Ukrainians, of support, to talk both about the present and the future, since the coming weeks, as we know, will be very difficult.’

Until peaceful negotiations can begin, the Euro will likely continue to be negatively impacted by the conflict.

GBP/EUR Exchange Rate Forecast: Dovish BoE Stance to Weigh on Pound?

Looking ahead, all eyes will be on how the markets will react to the BoE’s interest rate decision, with the expected 25bps rate hike not surprising investors. With outside hopes of a bigger increase not materialising, the continued dovish stance of the BoE could further dampen investor’s spirits.

Elsewhere, final readings for Euro area inflation rates are released tomorrow. Unless there is a surprise change to the reading, confirmations of a record high 8.1% inflation are unlikely to impact the Euro any further.

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