Pound Euro (GBP/EUR) Exchange Rate Slides despite BoE Pointing to Further Rate Hikes

December 15, 2022 - Written by John Cameron

STORY LINK Pound Euro (GBP/EUR) Exchange Rate Slides despite BoE Pointing to Further Rate Hikes

Pound Euro (GBP/EUR) Exchange Rate Slides despite BoE Pointing to Further Rate Hikes

The Pound Euro (GBP/EUR) exchange rate dropped on Thursday, as the Bank of England (BoE) supplemented the promise of further interest rate hikes with a dour outlook on the UK’s economy.

At the time of writing, GBP/EUR traded at around €1.1569, a decrease of roughly 0.6% from Wednesday’s morning rates.

Pound (GBP) Weakens despite BoE Promising More Rate Hikes

The Pound (GBP) weakened on Thursday, despite the Bank of England (BoE) pointing to further tightening after announcing a 50bps interest rate hike.

Bringing the current UK interest rate to 3.5%, the BoE expanded upon the reasoning for the hike. The accompanying meeting minutes explained: ‘The labour market remains tight and there has been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence and thus justifies a further forceful monetary policy response. The majority of the Committee judges that, should the economy evolve broadly in line with the November Monetary Policy Report projections, further increases in Bank Rate may be required for a sustainable return of inflation to target.’

Despite the promise of further rate hikes, GBP investors appeared to remain focused on the BoE’s discussion of the condition of the UK economy. The BoE has predicted that the UK economy will decline by 0.1% in the fourth quarter, more than the previous expectations.

As such, the gloomy situation for the UK economy is keeping investors away from Sterling. Furthermore, industrial action has continued to intensify across the UK with Nurses holding the first walk out in the NHS’ history.


The action may be further weighing on Sterling by pointing to an increasingly discontented workforce, on top of the existing issues of the cost-of-living crisis and inflation.

Euro (EUR) Strengthens as ECB Posts 50bps Hike

The Euro (EUR) strengthened on Thursday, following the European Central Bank’s (ECB) decision to raise Eurozone interest rates by 50bps.

While the hike was expected, the positive boost for the Euro came from the ECB’s projections alongside the announcement. The ECN believes that the bloc’s economy will have grown by 3.4% during 2022, and will continue to grow over 2023 and 2024, avoiding a recession.

Furthermore, the ECB doubled down on continued interest rate hikes, providing the currency with further support as investors took notice of the promise of further returns on investments.

The ECB’s report stated: ‘In particular, the Governing Council judges that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target.’

Pound Euro (GBP/EUR) Exchange Rate Forecast: UK Retail Sales to Weaken Sterling?

Looking ahead for the Pound, the primary catalyst of movement is likely to be Friday’s retail sales data for November. The monthly data is expected to show a decline from 0.6% to 0.3%, which could weaken Sterling by further demonstrating the impact the cost-of-living crisis is having on consumers.

Furthermore, the latest UK private sector PMIs are due to print on Friday. Further contractions are expected for both the services and manufacturing sectors, which could stoke fears that the recession may be worse than currently expected, denting Sterling further.

For the Euro, private sector PMIs are also scheduled to print on Friday. With no change expected, it may still weaken the single currency by showing the bloc’s economy is still weak and struggling with a lack of momentum.

Furthermore, forecasts expect Friday’s balance of trade data for the Eurozone to show a widening of the trade deficit. This could pull the Euro lower, by pointing to a fall in exports.

Similarly, the Eurozone’s final inflation data is due to print on Friday. A surprise change in the figures could serve to weaken the Euro.

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TAGS: Pound Euro Forecasts