Pound Euro (GBP/EUR) Exchange Rate Slips as Markets Anticipate BoE Slowdown

February 7, 2023 - Written by John Cameron

STORY LINK Pound Euro (GBP/EUR) Exchange Rate Slips as Markets Anticipate BoE Slowdown

Pound Euro (GBP/EUR) Exchange Rate Edges Lower amid Pullback in BoE Bets

The Pound Euro (GBP/EUR) exchange rate ticked lower on Tuesday. The pairing was pulled lower by bets on a more dovish forward path from the Bank of England (BoE).

The exchange rate saw its losses limited by poor German industrial data, however. Cautious comments from European Central Bank (ECB) policymakers also prevented a sharp drop in GBP/EUR.

At time of writing the GBP/EUR exchange rate was at around €1.1188, which was down roughly 0.2% from that morning’s opening figures.

Pound’s (GBP) Losses Limited by Hawkish Signals from BoE Policymakers

The Pound (GBP) slipped against its peers on Tuesday. Expectations of a slower pace of policy tightening from the BoE weighed on Sterling.

Following last week’s interest rate decision from the central bank, investors are now anticipating that the BoE will soon bring an end to any further interest rate hikes.

Some hawkish signals from BoE policymakers underpinned Sterling on Tuesday, however. A speech from Monetary Policy Committee (MPC) member Catherine Mann hinted at further rate hikes from the central bank.

Speaking in Budapest on Monday, Mann said:

‘We need to stay the course, and in my view the next step in Bank rate is still more likely to be another hike than a cut or hold.’

Mann’s view was supported by speculation that markets may have reacted too drastically to the BoE’s dovish signals.

Matthew Ryan, head of market strategy at Ebury, said:

‘We think investors may be over-reacting to this 'dovish pivot' since the Bank of England views have proven quite erratic over this tightening cycle.

Euro (EUR) Tumbles as German Industrial Output Slumps, Edges Higher Against GBP

The Euro (EUR) slumped on Tuesday, although made slim gains against a weaker Pound. A risk-on mood and poor German industrial data contributed to losses for the single currency.

Production in Germany’s industrial sector fell by 3.1% in December, which was well above the forecast 0.7% fall. The trading bloc’s energy crisis was highlighted as a key driver of the downturn. The data added to signs of downturn in the German economy and pulled the Euro lower.

Pantheon Macroeconomics' chief eurozone economist Claus Vistesen said:

‘This completes a miserable end to 2022 for Germany's economy following the crash in retail sales and plunge in exports.’

More cautious comments from ECB policymaker Francois Villeroy de Galhau also added to pressure on the Euro. Villeroy signalled that he felt Eurozone inflation may be near to its peak. The comments prompted a pullback in ECB rate hike bets in markets.

GBP/EUR Exchange Rate Forecast: Will UK Contraction Pull Pound Lower

Looking to the rest of the week ahead for Sterling, speeches from multiple BoE policymakers could prompt movement in GBP. Markets will be watching for further signals of a more aggressive stance from the central bank following Catherine Mann’s hawkish speech on Monday.

On Friday, a raft of economic data could weigh on the Pound if it prints as forecast. GDP figures for December are expected to indicate a 0.3% contraction in the UK’s economy. Additionally, GDP growth in the fourth of quarter of 2023 is forecast to have stagnated. If the data prints as forecast, it will likely add to predictions of a recession for the UK in 2023.

Domestic headlines may also generate headwinds for Sterling this week. Further industrial action across the UK may continue to dent enthusiasm in the Pound. Additionally, the prospect of political instability may also keep pressure on GBP.

For the Euro, the latest German inflation figures on Wednesday could provide a boost to EUR if they print as forecast. Evidence of persistent inflation may also bolster bets on further aggressive action from the ECB.

Speeches from European Central Bank policymakers throughout the week could also cause movement in EUR. Markets will be watching the speeches for confirmation additional 50bps interest rate hikes from the central bank.

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TAGS: Pound Euro Forecasts