BoE Rate Hike Prospects and what it could mean for the Euro Pound (EUR/GBP) Exchange Rate
The Euro Pound (EUR/GBP) exchange rate could encounter greater volatility as we progress towards the Bank of England’s (BoE) upcoming rate decision in May, but with consumer price inflation in the UK easing lower than expected in March, is a rate hike still likely?
According to the Office for National Statistics, consumer price inflation slipped from 2.7% to 2.5% year-on-year in March, with the monthly reading also contracting, this time from 0.4% to 0.1%.
This was the lowest reading in a year, but despite the fall the reading still remains above the BoE’s target range.
Moreover, wage growth in the UK has finally exceeded inflation, and unemployment has crucially shifted to record lows of 4.2%.
Because of these readings and the underlying positive outlook for the British economy it is unlikely that the fall in inflation will push Monetary Policy Committee (MPC) members away from a rate hike,
Laith Khalaf, Senior Analyst at Hargreaves Lansdown echoed this sentiment, pointing out that wage growth is now ‘heading in the right direction’ and that the shift in public sector pay suggests there’s ‘some more momentum in the post’.
This could change, however, depending on next week’s UK GDP readings for Q1 2018, particularly with markets expecting a small decline thanks to recent severe weather conditions.
Euro Area Markit PMI Readings Ahead – Could Germany’s Production Dip Limit the EUR/GBP Exchange Rate?
The Euro has fluctuated in recent days, stifled somewhat by the poor performance of German production data and the ensuing recession warnings from various think-tanks.
One such group, the Dusseldorf-based Macroeconomic Policy Institute (IMK), has stated that the risk of a German recession in the next three months has jumped ‘markedly’ in April to 32.4% – 6.8% higher than it was in March.
This was predominantly due to the downturns in factory orders, business confidence and interest rate spreads.
The danger here is that Germany’s latest purchasing managers’ index (PMI) readings for April could also reflect the same downturn and in turn, negatively affect the performance of the single currency as a whole.
In this regard, markets will be keeping an eye out for Monday’s PMI releases and Tuesday’s IFO business climate expectations and current assessment readings, as both of these could potentially put the EUR/GBP exchange rate under renewed pressure.
ECB Rate Decision due Thursday – Could an end to the ECB’s Bond Purchasing Scheme be nigh?
The European Central Bank’s (ECB) next rate decision is due on Thursday next week and whilst markets are not expecting movement in the benchmark interest rate, there is the possibility that the central bank will reveal plans to wind down its bond-purchasing measures before the year is up.
Indeed, ECB Policymaker Ewald Nowotny expressed a similar attitude recently, claiming that winding down the program could then pave the way for the first rate rise since 2011.
This perspective was summarily dismissed as not ‘representing the views of the Governing Council’ by the ECB, but since then we have seen a marked rise in the Eurozone inflation rate, which rose month-on-month from 0.2% to 1.0% in March.
Whether this will be enough to push the bank towards tighter policy measures remains to be seen, but if there is any indication of hawkishness or outright optimism in the accompanying statements on Thursday then the EUR/GBP exchange rate could see a small rise.