Pound Euro Exchange Rate News: GBP/EUR Strengthened as ECB Increased Interest Rates by 25bps

May 4, 2023 - Written by John Cameron

STORY LINK Pound Euro Exchange Rate News: GBP/EUR Strengthened as ECB Increased Interest Rates by 25bps

Euro (EUR) Weakens as ECB Refuses to Commit to Further Hikes

The Euro (EUR) softened in the wake of the European Central Bank’s (ECB) interest rate decision. The central bank expectedly increased the interest rate by 25bps, marking the seventh consecutive hike, bringing the cash rate to 3.75%.

With inflation climbing to 7% in April, the central bank admitted that the inflation rate remains far too high. The accompanying statement said:

‘The inflation outlook continues to be too high for too long. In light of the ongoing high inflation pressures, the Governing Council today decided to raise the three key ECB interest rates by 25 basis points.’

However, EUR investors were discouraged as the ECB refused to commit to further hikes. Lagarde added that any future rate increases would be contingent on the inflation outlook, as well as underlying price pressures. With inflation remaining far above the target rate of 2%, the ECB is wary of negative impacts on the economy through monetary policy. Altaf Kassam, EMEA Head of Investment Strategy & Research at State Street Global Advisors believe the decision was a dovish one, adding:

‘In the end, downshifting to 25bps was the path of least resistance, allowing the ECB to continue to show resolve in the fight against inflation while keeping one eye on financial stability risks. Arguably, this 25bps hike gives the Bank the optionality they need going forward given the dual risks of growth and inflation.’

Providing a modicum of support to the Euro, however, is Lagarde’s hawkish remarks in her press conference. Contrary to hints in the accompanying statement, Lagarde said that the ECB has ruled out pausing, as they ‘have more ground to cover’.

Pound (GBP) Supported by Over-Achieving Service Sector

Meanwhile, the Pound (GBP) found modest support against some of its peers on Thursday as the service sector expanded far better than expected.

Business activity in the sector climbed to its highest level in over a year as services PMI came in at 55.9, far above both the estimate and preliminary figures. With new orders hitting a 14-month high, as well as strong job creation, the April figure was buoyed by improving demand conditions. Tim Moore, Economics Director at S&P Global, commented:

‘A strong rate of service sector growth meant that the UK economy started the second quarter of 2023 in positive fashion. Overall private sector output expanded at the fastest pace for one year, despite another fall in manufacturing production during April.

‘While the growth outlook has improved considerably for the service economy this spring, a swift rebound in customer demand appears to have reignited inflationary pressures.’

GBP/EUR Exchange Rate Forecast: Eurozone Retail Sales to Sour the Euro Further?

Looking ahead, the Pound Euro exchange rate could see further movement with the release of retail sales in the Euro area. Following a disappointing 0.8% fall MoM in March, sales are expected to fall further as predictions of a 0.1% decline.

Meanwhile, the Pound will head into the long weekend trading on market sentiment amid a lack of economic data. With a flurry of movement amid interest rate decisions, Sterling could fluctuate on a wavering market sentiment.

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