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Euro Pound (EUR/GBP) Exchange Rate Forecast: Can we expect a BoE Rate Hike in May?

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Pound (GBP) Exchange Rate Outlook Supported by May Rate Hike Hopes

The Euro Pound (EUR/GBP) exchange rate could come under renewed pressure in the coming weeks as markets prepare for the possibility of a Bank of England (BoE) rate hike in May.

BoE Policymaker Ian McCafferty has only added to this anticipation after his vote to immediately raise the baseline rate in March, telling Reuters recently that the central bank should not delay raising interest rates again, and that accelerating wage growth and the overall pick up in the global economy requires tighter monetary policy measures as soon as possible.

Whilst the central bank has been proven incorrect in the past in regards to the trajectory of wages, recent labour market surveys and ecostats this year have continued to show a marked recovery, with unemployment at record lows and pay growth looking increasingly sustainable.

This means that a May rate hike is incredibly likely in the eyes of the markets, with an increasing number of policymakers being regarded as hawkish by analysts.

ECB Nowotny Proposes Hawkish Rate Hike Strategy – Will the ECB Slash their Bond Purchasing Scheme this summer?

Hawkish hopes for the European Central Bank (ECB) also received a brief lift this week in the form of comments from Policymaker Ewald Nowotny, who proposed a strategy that could get the ball rolling on rate rises.

Nowotny told Reuters that the ECB’s bond buying program could be slashed by the end of this year, an event that could lay the groundworks for the bank’s first rate rise since 2011.

Nowotny stated:

‘I would have no problem with moving from -0.4% to -0.2% as a first step and then, as a second step, include the policy rate. This is the structure. The exact timing? It’s too early to tell you’.

It should also be stressed, however, that the ECB quickly responded by distancing itself from Nowotny’s comments, stating:

‘Governor Nowotny’s views are his own. They do not represent the view of the Governing Council’.

Nonetheless, these comments provided a jump in demand for the single currency, with markets hopeful that the central bank will not extend its purchasing program beyond the current timeline.

UK, EU Consumer Price Inflation Ahead – EUR/GBP Exchange Rate Forecast

The Euro Pound (EUR/GBP) exchange rate could see greater volatility next week as markets react to the consumer price inflation readings for both the bloc and the UK.

Both readings will prove pertinent, with anything less than substantial fall in the UK’s consumer price growth liable to keep the BoE on track for a rate rise.

The outlook for the bloc, however, is rather gloomier, with the Eurozone’s inflation rate historically remaining far below the central bank’s target levels.