Pound Euro Exchange Rate News: GBP/EUR Rallied on Elevated BoE Rate Hike Bets

May 30, 2023 - Written by John Cameron

STORY LINK Pound Euro Exchange Rate News: GBP/EUR Rallied on Elevated BoE Rate Hike Bets

Pound (GBP) Supported by BoE Rate Hike Expectations

The Pound (GBP) found renewed strength against its peers on Tuesday despite a lack of economic data. Last week’s shock inflation reading, with stronger-than-expected headline CPI and stubbornly-high core inflation, further tightening could be inevitable.

The market has begun pricing in rate rises beyond the policy meeting in June from the Bank of England (BoE). Expectations of the interest rate to hit 5.5% before the autumn has buoyed investors on the prospect of the central bank continuing its aggressive hike cycle. Despite little in the way of major economic data, the prospect of further tightening when the rest of the central banks are contemplating pausing or cutting.

Further signs that the labour market remains tight, and with a strong and resilient retail sector, the BoE will have more wiggle room for further tightening. As inflation still sits far above the target rate of 2%, the central bank still has a lot of work to do to rein in inflation.

Elsewhere, the British Retail Consortium (BRC) revealed that food price inflation slowed from 15.7% to 15.4%, the first slowdown in over a year. With food inflation finally showing signs that prices may have peaked. Helen Dickinson, Chief Executive of BRC, commented on the latest data:

‘While there is reason to believe that food inflation might be peaking, it is vital that government does not hamper this early progress by piling more costs on to retailers and forcing up the cost of goods even further.’

Euro (EUR) Under Pressure from Multiple Headwinds

Meanwhile, the Euro (EUR) struggled for demand despite their own elevated rate hike expectations. A lack of major economic data saw the single currency vulnerable to external factors and a wavering market mood.

The market mood remains cautious, despite the optimism over a deal struck between the White House and Republicans. The US debt ceiling negotiations finally came to a head over the weekend as President Joe Biden and House Speaker Kevin McCarthy struck a deal. As long as the bill is passed through Congress, a potentially disastrous financial catastrophe would be avoided. The negative correlation the Euro shares with the US Dollar has seen the former slide further on the latter’s strength. Biden said of the deal:

‘This is a deal that’s good news for the American people. It takes the threat of catastrophic default off the table, protects our hard-earned and historic economic recovery.’

Domestically, downbeat economic sentiment could be weighing on EUR investors. Both business and consumer confidence declined in May, highlighting the uncertainty surrounding the Eurozone economy. In the wake of Germany, Europe’s largest economy, slipping into a recession in the first quarter of this year, fears are growing about the economic climate.

GBP/EUR Exchange Rate Forecast: Eurozone Inflation to Pressure the Euro Further?

Looking ahead, the Pound Euro exchange rate could see further movement with a flurry of inflation data across the Euro area. Eurozone inflation is expected to ease to 6.3%, which could see rate hike bets from the European Central Bank (ECB) tempered, potentially dragging the Euro lower.

Meanwhile, the Pound could be mainly left exposed to market sentiment and rate hike bets from the BoE. A thin trading calendar could keep Sterling afloat on rate hike bets alone.

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