Pound Euro (GBP/EUR) Exchange Rate Hobbled by Pullback in BoE Bets

May 15, 2023 - Written by John Cameron

STORY LINK Pound Euro (GBP/EUR) Exchange Rate Hobbled by Pullback in BoE Bets

Pound Euro (GBP/EUR) Exchange Rate Climbs amid Upbeat Market Mood

The Pound Euro (GBP/EUR) exchange rate made moderate gains on Monday. A risk-on mood pushed the pairing higher.

GBP/EUR saw its gains hindered by bets on additional rate hikes from the European Central Bank (ECB). Additionally, dovish expectations for future action from the Bank of England (BoE) also weighed on the pair.

At time of writing the GBP/EUR exchange rate was at around €1.1501, which was up around 0.3% from that morning’s opening figures.

Pound’s (GBP) Gains Capped by Dovish BoE Bets

The Pound (GBP) benefitted from a positive risk tone on Monday, although bets on Sterling were limited ahead of key jobs data on Tuesday.

Dovish expectations for future policy tightening from the BoE dampened enthusiasm from GBP, however. After cautious comments from Governor Andrew Bailey last week, markets are now pricing in just 20bps of tightening from the central bank. Bailey signalled that UK inflation was set to fall faster than previously thought.

Speaking on inflation’s forward path, ING’s Developed Markets Economist James Smith said:

‘The worry of BoE hawks is that services inflation – the part of the basket that tends to be slower-moving – could stay higher for longer. But at 6.7%, we think we’re virtually at the peak and it should go below 5% by the year-end. That’s still uncomfortable and could be a catalyst for the Bank to hold rates as the Federal Reserve begins to cut.’

Euro (EUR) Gains after Upbeat Eurozone Forecasts, Slips against Pound

The Euro (EUR) firmed on Monday but saw losses against the Pound. A return of global risk appetite kept pressure on EUR over the course of the day.

A downturn in Eurozone industrial production in March also dented confidence in the single currency on Monday. Production tumbled by 4.1% following 1.5% growth in February, bringing it to its lowest levels since October 2021.

On the other hand, improved forecasts for the Eurozone lent support to the single currency. The latest growth predictions from the European Commission (EC) were revised higher for 2023. The Eurozone is now expected to see 1% growth over 2023 and avoid a recession.

Additionally, the EC’s forecasts of slowly falling inflation underpinned the Euro due to increased ECB rate hike bets.

The release of the ECB’s latest economic bulletin limited these bets, however. The central bank signalled that its policy tightening schedule was already influencing the Eurozone economy, and that future hikes may be smaller.

GBP/EUR Exchange Rate Forecast: Will Cooler UK Labour Market Dent Sterling?

The latest UK employment data could push the Pound higher on Tuesday if it prints as forecast. March’s unemployment rate is expected to remain unchanged at 3.8%, its highest point since July 2022.

Additionally, wage growth in March is set to continue to grow to 5.8%. Persistent wage growth could signal a hotter labour market and prompt renewed BoE rate hike bets.

On the other hand, Sterling could see losses on Wednesday following a speech from BoE Governor Andrew Bailey.

For the Euro, several data releases could cause mixed movements in the single currency on Tuesday. An expected sharp decline in Eurozone trade figures may kick off EUR’s potential slide.

A downbeat reading of Germany’s ZEW economic sentiment index could deepen the Euro’s losses. May’s reading is set to slump into negative territory, falling to -5.5. from 4.1.

On the other hand, first quarter growth figures for the Eurozone could cushion losses for the Euro. The trading bloc is expected to have seen 0.1% growth in the first quarter of 2023.

On Wednesday, the final reading of April’s Eurozone inflation figures could provide a further boost to the Euro. The reading is set confirm that inflation rose to 7% last month. The data may also prompt fresh ECB rate hike bets.

Similarly, Friday’s German PPI figures for April could also add to evidence of persistent inflationary pressures in the trading bloc. April’s PPI is expected to improve to -0.5% from -2.6%.

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TAGS: Pound Euro Forecasts