Pound Euro Exchange Rate News: GBP/EUR Traded Erratically Ahead of BoE Interest Rate Decision

March 23, 2023 - Written by John Cameron

STORY LINK Pound Euro Exchange Rate News: GBP/EUR Traded Erratically Ahead of BoE Interest Rate Decision

Pound (GBP) Undermined by Dovish Rate Hike Fears

The Pound (GBP) traded without a clear direction on Thursday as the market await the latest interest rate decision from the Bank of England (BoE). Amid the banking sector turmoil and a shaky UK economy, the central bank will have to tread carefully with the decision.

Red-hot inflation reading from Wednesday saw a surge in rate hike bets, with the probability of a 25bps raise sat at 80%. Against an expectation of easing to 9.9%, annualised inflation in the UK printed higher at 10.4%. However, concerns over the fragility of the financial sector could be weighing on the policymakers at the BoE. With banking collapses across the pond due to the delayed impact of sky-high interest rates, contagion fears linger.

The markets still expect an 11th consecutive interest rate rise, and in the wake of both the European Central Bank (ECB) and the Federal Reserve both raising their respective cash rates, the BoE is likely to follow suit. The concern with GBP investors, however, is the nature of the rate hike. The ongoing volatility in the financial sector, mixed with the UK’s own economic woes, could see the BoE take a dovish turn. Ellie Henderson, Economist at Investec, commented:

‘When deciding the appropriate level of the Bank rate the Monetary Policy Committee (MPC) will have to assess which is the lesser of two evils: the risk of inflation being higher for longer or the current threat to financial stability stemming from the rapidly evolving fears of a banking crisis.’

Euro (EUR) Supported by Weakened US Dollar

The Euro (EUR) enjoyed its negative correlation with the US Dollar in the wake of a dovish rate hike from the Federal Reserve. However, those gains were tempered somewhat on Thursday morning amid a lack of major economic data.
A mixed market mood, amidst the turbulence of the banking sector, the Euro struggled to find a clear direction even with the relative weakness of the US Dollar.

Providing some modest support to the single currency, however, are a continued hawkish stance from the ECB. With several ECB policymakers reiterating the desire to bring inflation down, elevated rate hike bets are keeping the Euro supported. In contrast with the more uncertain Fed, the single currency could see out the week’s session with moderate strength.

With fears of a financial crisis somewhat easing of late, the Euro could be finding demand on the perceived strength of the European banking system. Pierre Wunsch, Belgium's central bank chief, joined the choruses of support of the resilience of European banks, and said:

‘We've been torturing the data in all directions and honestly, what we see is no problem. Even if banks would have to sell all of their obligations and take the losses, they would still have enough capital.’

GBP/EUR Exchange Rate Forecast: Dovish Hike to Sink Sterling?

Looking ahead, the Pound Euro exchange rate could see fluctuations with the latest policy announcement from the BoE. If the central bank meets expectations and raises interest rates to 4.25%, the vote split could be the deciding factor in influencing investors.

Meanwhile, the Euro will continue to trade on market sentiment and its negative correlation with the faltering ‘Greenback’ to close out the week.

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TAGS: Pound Euro Forecasts