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Pound Euro Exchange Rate Falls after BoE interest Rate Decision

August 4, 2022 - Written by John Cameron

Pound Euro (GBP/EUR) Exchange Rate Drops after BoE Interest Rate Decision

The Pound Euro (GBP/EUR) exchange rate fell on Thursday after the Bank of England (BoE) rose interest rates by 0.5%. Despite this, forecasts of higher inflation and the possibility of a fourth quarter recession for the UK likely contributed to the currency pair’s fall.

A weaker US Dollar (USD) may have also pulled the pair lower, as well as an uptick to German bond yields.

Fears of an imminent Eurozone recession could have limited significant losses for GBP/EUR, however. The economic impact of Europe’s energy supply crisis likely heightened these concerns.

At time of writing the GBP/EUR exchange rate was at around €1.884, which was down around -0.5% from this morning’s opening figures.

Pound (GBP) Plummets as BoE Warns of Fourth Quarter Recession

The Pound (GBP) tumbled against its rivals after the Bank of England’s 0.5% interest rate hike. The central bank chose to raise rates by the largest amount in 27 years. The central bank’s Monetary Policy Committee (MPC) voted by a majority of 8-1 in favour of the rate hike.

Markets had largely priced in the move ahead of time after hawkish signals from BoE Governor Andrew Bailey. The central bank’s downbeat forecast for the UK economy saw Sterling slump after the decision, however.

The BoE warned that inflation would hit 13% in October when energy prices are set to soar. The central bank also warned that the UK was set to enter a recession in the fourth quarter of 2022.

Speaking on the rate hike, Institute of Directors (IoD) chief economist Kitty Ussher welcomed the move:

‘Concern about inflation is causing firms to hesitate before committing to essential long-term investment. With energy prices continuing to rise, strong intervention is needed to increase confidence that we will soon be through the worst, so that boardroom decision-makers can plan ahead with greater certainty.’

The prospect of further interest rate hikes from the BoE could help to limit long-term losses for Sterling, however. Bailey signalled today that ‘all options’ were being considered for September’s meeting, and that a faster pace of tightening in the short-term may be necessary to prevent repeated drastic rate hikes.

Euro (EUR) Gains amid Renewed ECB Rate Hike Expectations

The Euro (EUR) is firmed against many of its competitors on Thursday. A pullback in US Dollar demand likely helped to bolster the single currency.

EUR may also be seeing a boost amid renewed bets on future interest rate hikes from the European Central Bank (ECB). The ECB’s consumer expectations survey, conducted in June, found that consumers expected prices to rise by 5% over the coming year.

Additionally, the survey found that consumers saw inflation reach 2.8% in three years time.

The release of the ECB’s latest economic bulletin may have also increased rate hike expectations. In the document, the central bank stated that ‘further normalisation of interest rates will be appropriate.’

The single currency may have also seen support from the announcement of further financial support in Italy amid Europe’s cost-of-living crisis.

Major gains for the Euro were likely limited by the increased possibility of Eurozone recession, however. Figures on Thursday indicated a fall to German factory orders and output for the Eurozone’s construction sector.

GBP/EUR Exchange Rate Forecast: Will Eurozone Energy Fears Worsen?

Looking to the remainder of the week for the Pound, market reactions to the BoE’s interest rate hike may dictate further movement in the currency.

Political uncertainty in the UK may weigh on the Pound over the rest of the week. The country’s ‘summer of discontent’ could also place pressure on GBP if further industrial action is announced.

For the Euro, a fall to Germany’s industrial production could dent confidence in the single currency if figures fall as forecast.

Recession fears may also pull EUR lower over the rest of the week. Further cuts to European energy supplies could intensify these concerns.

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