Pound Euro (GBP/EUR) Exchange Rate Ticks Higher as Markets Bet on BoE Slowdown

March 13, 2023 - Written by John Cameron

STORY LINK Pound Euro (GBP/EUR) Exchange Rate Ticks Higher as Markets Bet on BoE Slowdown

Pound Euro (GBP/EUR) Exchange Rate Firms as Risk Appetite Improves

The Pound Euro (GBP/EUR) exchange rate edged higher on Monday. The pairing found support from risk-on mood, as well as growing expectations of a dovish shift in European Central Bank (ECB) policy.

On the other hand, GBP/EUR’s gains were limited by market jitters ahead of the UK government’s spring budget.

At time of writing the GBP/EUR exchange rate was at around €1.1323, which was up roughly 0.2% from that morning’s opening figures.

Pound (GBP) Gains as Possibility of BoE and Fed Policy Convergence Grows

The Pound (GBP) firmed against many of its peers on Monday. Sterling benefitted from a healthy risk appetite in the markets.

GBP also found confidence from the bailout of Silicon Valley Bank’s (SVB) UK arm by HSBC and the Bank of England (BoE).

The Pound’s gains were capped by growing expectations of a pause in policy tightening from the BoE, however. Interest rate futures increased the chance of no change in rates at roughly 40%, up from 25% the week before.

On the other hand, the possibility of this convergence in policy between the BoE and the US Federal Reserve lent support to Sterling. The collapse of SVB led to markets drastically paring back bets on further hikes from the Fed.

Finally bets on the Pound were subdued ahead of the unveiling of the UK’s spring budget later this week.

Euro (EUR) Falls amid Return of Global Risk Appetite

The Euro (EUR) slipped on Monday. A return of global risk appetite weighed on the single currency after the collapse of SVB.

EUR benefitted from a weaker US Dollar (USD) amid the fallout, however. Eurogroup President Paschal Donohoe stated that the trading bloc was more resilient to the collapse of the bank, and that the Eurozone’s exposure to the crisis was ‘limited’.

German bond yields did fall in the wake of SVB’s collapse however, which pulled the Euro lower.

The possibility of a more cautious stance from the European Central Bank (ECB) following next week’s interest rate decision may also be keeping pressure on EUR.

Speaking on the ECB’s upcoming meeting, ING’s global head of macro Carsten Brzeski said:

‘It could very well be that the ECB chooses a very defensive communication strategy, stressing the meeting-by-meeting approach and (hopefully) suppressing any need to give forward guidance.’

GBP/EUR Exchange Rate Forecast: Will ECB Hint at Policy Tightening Slowdown?

Looking to the coming week for the Pound, the latest employment data on Tuesday could prompt losses in the currency if it prints as expected. January’s unemployment rate is set to tick higher to 3.8%, its first increase in three months.

As well as the unemployment data, the most recent wage growth data is also forecast to slip in three months leading to January. Wage growth including bonuses is set to fall to 5.6%. The UK employment data could point to a cooling labour market in the UK. This may prompt a pullback in BoE rate hike bets which could prompt losses in GBP.

Finally for Sterling, the unveiling of the UK’s spring budget on Wednesday is likely to prompt movement in the currency.

For the Euro, markets will be most keenly awaiting the ECB’s interest rate decision on Thursday. Whilst the ECB is forecast to hike rates by 50bps, evidence of a split between policymakers means that expectations are mixed.

If the central bank hikes rates as forecast and points to further aggressive action it could boost the Euro. On the other hand, signs of a dovish pivot from the ECB could pull EUR lower. A speech from ECB President Christine Lagarde could provide insight into the central bank’s forward path.

Finally for the single currency, the final reading of February’s Eurozone inflation could add to any dovish signals from the ECB. Inflation for the trading bloc is set to be revised lower to 8.5%.

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TAGS: Pound Euro Forecasts