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Pound Euro Exchange Rate to Bolster on Increased BoE Rate Hike Bets?

Pound Coin on Euro Banknote GBP/EUR

GBP/EUR Exchange Rate Wavers amid Elevated Rate Hike Bets

The Pound Euro (GBP/EUR) exchange rate is rangebound today as hotter-than-expected inflation for the UK improved rate hike expectations. However, an equally bullish European Central Bank (ECB) continue to prop the Euro up with further tightening bets.

At time of writing the GBP/EUR exchange rate is around €1.1343, relatively unchanged from this morning.

Pound (GBP) Undermined by Shaky Economic Outlook

The Pound lost most of its gains after yesterday’s surprise inflation reading. Against expectations of easing to 9.1%, headline CPI remained in double digits at 10.1%. Expectations for the BoE to continue raising the interest rate rallied Sterling in yesterday’s session.

However, concerns of an economic slowdown amid the worsening cost-of-living crisis could be keeping a firm lid on the Pound today. Michael Saunders, former policymaker for the BoE, claims that the central bank will raise the cash rate once more. Pointing to surging energy prices as the main catalyst for such sticky inflation, Saunders is optimistic that the UK has finally turned a corner. He expects inflation to start rapidly falling later this year. Saunders added:

‘I think they’re probably almost done now…. The big tightening cycle, of interest rates going up meeting after meeting, I think that’s largely over.’

Looking ahead, underwhelming retail sales could sap demand for Sterling if forecasts prove accurate. Coming after two months of growth, retail sales are expected to slide by 0.5%, highlighting the ever-worsening cost-of-living crisis.

However, predicted positive PMIs could limit the losses. An expected improvement across the board could boost investors’ moods. The service sector is expected to remain at 52.9, remaining in the expansion threshold.

Euro (EUR) Under Pressure for Easing PPI

Meanwhile, the Euro also saw its earlier gains wiped out as German producer price inflation experienced a significant easing in March. Coming in at -2.6%, the sharp downturn could force the ECB from continuing its tightening cycle.

However, ECB policymaker Klaas Knot reassured investors that it was far too early to consider pausing the rate hike cycle. In an interview, Knot elaborated:

‘Mildly restrictive territory will not be enough to counter an underlying inflation rate that has been creeping up towards 6%. We need a sufficiently restrictive stance. Where is sufficiently restrictive, I don’t know, but clearly not where we are today.’

Looking ahead, and tomorrow sees the flash estimates of Eurozone PMI data. A mixed bag of results could pull the Euro in opposite directions, as the service sector is predicted to remain in growth but exhibiting a slowdown. But the manufacturing sector is set to remain in contraction territory, albeit a modest improvement.

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