Pound Euro Exchange Rate News: GBP/EUR Wavered amid a Dovish ECB 50bps Rate Hike

March 16, 2023 - Written by John Cameron

STORY LINK Pound Euro Exchange Rate News: GBP/EUR Wavered amid a Dovish ECB 50bps Rate Hike

Euro (EUR) Undermined by Dovish Guidance from Lagarde

The Euro (EUR) failed to rally in the wake of the European Central Bank (ECB) raising the interest rate to the highest level since late 2008. Despite inflation remaining stubbornly high, policymakers also commented that the European banking sector remained resilient, with strong capital and liquidity positions.

In an extra effort to temper concerns surrounding the Silicon Valley Bank (SVB) and Credit Suisse collapses, ECB policymakers said they were monitoring current market conditions carefully. The ECB added that they were willing to take action in order to protect the banking system:

‘The Governing Council is monitoring current market tensions closely and stands ready to respond as necessary to preserve price stability and financial stability in the euro area. The euro area banking sector is resilient, with strong capital and liquidity positions.

‘In any case, the ECB’s policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed and to preserve the smooth transmission of monetary policy.’

However, combined with an uncharacteristically dovish speech from ECB President Christine Lagarde, EUR investors appear less than impressed. When confronted over a lack of forward guidance for future rate hikes, and if the ECB had reached peak interest rates, Lagarde replied more cautiously.

When comparing the latest ECB rate hike to the one in July 2008 that was subsequently reversed a few months later when Lehman Brothers failed, Lagarde was asked if the central bank is making a similar mistake today. Lagarde responded:
‘The banks are in ‘a completely different position from 2008. And, you know, crises are never exactly the same anyway.’

Pound (GBP) Pressured by Persistent Cost-of-Living Crisis

Meanwhile, the Pound (GBP) also struggled for a clear direction on Thursday amid a lack of economic data. With the Spring Budget still being dissected and digested by investors, concerns of tumbling living standards have overshadowed the optimism over the long-term future of the UK.

The poverty thinktank Resolution Foundation, has cautioned that despite the Office for Budget Responsibility’s (OBR) upwardly revised forecast, the familiar underlying issues could keep pressure on the economy. Torsten Bell, Chief Executive of the Resolution Foundation, cautioned that households could be worse off than before the pandemic by 2028. If household incomes continue to lag behind inflation, the UK’s cost-of-living crisis could linger. He added:

‘But stepping back, the UK’s underlying challenges remain largely unchanged. We are investing too little and growing too slowly. Our citizens’ living standards are stagnant. We ask them to pay higher taxes, while cutting public services.’

GBP/EUR Exchange Rate Forecast: Elevated Rate Hike Expectations to Buoy the Euro?

Looking ahead, the Pound Euro exchange rate could see renewed weakness on further rate hike bets from the ECB. Analysts at Nordea think that the ECB will deliver several more rate hikes in the coming meetings. They said:

‘The ECB hiked rates by 50 bps despite ongoing market turbulence. The uncertain market situation led to the ECB not giving any signals about the future – the central bank is finally truly in a data-dependent mode.’

Meanwhile, the Pound will have to rely on market sentiment and domestic pressures for movement. Without any major economic data due until next week’s session, Sterling could waver on pessimism surrounding the economic climate.

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TAGS: Pound Euro Forecasts