Pound Euro (GBP/EUR) Exchange Rate Flattens amid Diminished BoE Rate Hike Bets

March 2, 2023 - Written by John Cameron

STORY LINK Pound Euro (GBP/EUR) Exchange Rate Flattens amid Diminished BoE Rate Hike Bets

Pound Euro (GBP/EUR) Exchange Rate Flattens amid Diminished BoE Rate Hike Bets

The Pound Euro (GBP/EUR) exchange rate traded sideways on Thursday, as GBP investors began to readjust their expectations of further interest rate hikes from the Bank of England (BoE).

At the time of writing, GBP/EUR traded at around €1.1276, showing minimal movement from Thursday’s opening rates.

Pound (GBP) Wavers as GBP Investors Pare Back Rate Hike Bets

The Pound (GBP) saw limited movement on Thursday, as pared back expectations for Bank of England (BoE) interest rate hikes continued to weigh on GBP.

Following on from BoE Governor Andrew Bailey’s speech on Wednesday, data released on Thursday morning showed that inflation expectations had begun to fall across various UK businesses.

Furthermore, the BoE’s Decision Maker Panel survey results also highlighted softening cost pressures, and that recruitment difficulties were on the rise.

Because of this, the room for the BoE to continue with higher rate hikes seemed to shrink, and prompted GBP investors to pare back their expectations.

James Smith, Developed Markets Economist at ING, commented: ‘Despite a surprise downward move in core services inflation last month, the latest wage data probably suggests the Bank has a little further to go on rate rises. But if the trends displayed in this latest survey continue over the next couple of months, then our base case is that the March rate hike will be the last.’

Euro (EUR) Underpinned by Hawkish ECB Bets

The Euro (EUR) saw muted trade on Thursday, despite inflation showing a surprise increase. February’s headline and core inflation data printed far above forecasts, with headline inflation only falling to 8.5%, while core inflation increased to 5.6%.

As such, the need for further aggressive tightening from the European Central Bank (ECB) became apparent. This may have cushioned the Euro from posting further losses amid a strengthening US Dollar and a souring economic outlook for the Eurozone.

Giles Coghlan, Chief Market Analyst for HYCM, commented on the data, stating: ‘High inflation means more aggressive ECB rates, which means less conducive business conditions for European companies. So what that's telling you is that interest rate expectations are taking another notch up and there's no relief in Europe.’

Furthermore, a cautious marked mood could have added further support for the safer Euro. However, as the mood favoured the US Dollar, it may have weighed on the single currency due to that pairing’s negative correlation.

However, the unemployment data for January may have capped the Euro’s potential during Thursday’s session. The Eurozone’s unemployment rate unexpectedly increased to 6.7% in January, which may provide reason for the ECB to be more cautious with rate hikes.

Pound Euro (GBP/EUR) Exchange Rate Forecast: Domestic Headwinds to Weigh on GBP?

Looking ahead for the Pound (GBP), macroeconomic data releases are thin on the ground through to the end of the week’s session. Because of this, Sterling may be left vulnerable to domestic headwinds.

The final readings of the S&P services PMI is due to print on Friday. If the index prints below the preliminary readings, Sterling is likely to weaken. However, affirmation that the service sector has returned to growth may bring some buoyancy to GBP rates.

For the Euro, the core catalyst of movement in the short term is likely to be the German balance of trade data for January. With Germany’s economy having a strong lean on exports, the forecast of a drop in the German trade surplus from €9.7bn to €8.6bn may have an impact on the single currency.

If this data prints as forecast, it could show weakness in the Eurozone’s largest economy, and prompt recession anxieties which could weaken the Euro.

Elsewhere, speeches from European Central Bank (ECB) policymakers could lend support to the common currency. With the ECB consistently striking a hawkish attitude towards inflation, further promises of rate hikes could spur the currency.

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Pound Euro Forecasts