Pound Euro Exchange Rate News: GBP/EUR Traded Erratically amid a Renewed Hawkish ECB

March 17, 2023 - Written by John Cameron

STORY LINK Pound Euro Exchange Rate News: GBP/EUR Traded Erratically amid a Renewed Hawkish ECB

Euro (EUR) Undermined by Lingering Banking Crisis Fears

The Euro (EUR) enjoyed modest success on Friday despite a lack of economic data and the financial sector crisis concerns.

Global market sentiment improved considerably late Thursday when the Federal Reserve announced a $30bn bailout for First Republic Bank. The deal subsequently eased investor fears of contagion in the US banking sector. US Treasury Secretary Janet Yellen welcomed the move, and reassured the markets that they should have confidence in the system, adding:

‘We felt that there was serious risk of contagion that could have brought down and triggered runs on many banks and that's something, given that our judgement is that the banking system overall is safe and sound.’

Despite the rescue effort, concerns remain over the fragility of not just the US banking system, but the European one too. Fears of more banks going under could be limiting the demand for the Euro.

However, renewed rate hike expectations could have provided some modest support to the Euro. European Central Bank (ECB) policymaker Peter Kazimir reassured EUR investors that the central bank had not reached the terminal rate just yet. He added:

‘Even the current events on the financial markets do not change my view that we need to continue. I am very well aware of the delicacy of the situation... but we are not yet at the finish line.’

Pound (GBP) Supported by Rate Hike Expectations

Meanwhile, the Pound (GBP) remained fairly subdued this morning amid a quiet week with data thin on the ground. With a wavering market sentiment, and an improvement in rate hike expectations, Sterling could be heading into the weekend without a clear direction.

With the fallout of the US banking sector crisis continuing, a last-minute bailout from the major banks in the US have allayed fears somewhat. With an improving market sentiment, the Pound could have climbed against its weaker peers.

Elsewhere, a pick-up in interest rate hike expectations from the Bank of England (BoE) could be keeping Sterling afloat. With the ECB meeting expectations and raising the cash rate by 50bps, the BoE is expected to follow suit, albeit with a smaller hike. Analysts at ING are expecting another hike, not a pause, as they added:

‘Our base case is a hike, although it’s admittedly a close call as we acknowledge it will depend on financial market developments and CPI numbers next week. The BoE is probably more relaxed than the ECB and the Fed, so the bar for pausing is lower.’

GBP/EUR Exchange Rate Forecast: Easing UK Inflation to Weigh on Sterling?

Looking ahead to next week’s session, the Pound Euro exchange rate could shift if the latest headline CPI inflation eases as expected. With forecasts of a fall to 9.9%, the BoE’s interest rate decision the next day could impact the pairing on the forward guidance from the central bank. Despite expectations of a 25bps raise, any indications of a pause in the near future could drag Sterling lower.

Meanwhile, the Euro will be mainly trading on market sentiment in light of the financial sector fears. PMI data and trade deficit could also impact the single currency. Amid expected mixed readings with manufacturing and services, the Euro could waver.

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TAGS: Pound Euro Forecasts