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Pound Euro Exchange Rate to Climb on BoE Rate Hike?

Pound and Euro coins lined up

GBP/EUR Exchange Rate Quiet ahead of Central Bank’s 50bps Rate Hikes

The Pound Euro (GBP/EUR) exchange rate is trading relatively narrowly this morning as investors are bracing for the central banks to raise their interest rates to the highest levels since the financial crisis.

At time of writing the GBP/EUR exchange rate is around €1.1379, relatively unchanged from this morning.

Pound (GBP) Undermined by Political Chaos

The Pound is remaining fairly quiet this morning ahead of the interest rate decision from the Bank of England (BoE). In the meantime, political pressures will no doubt keep investors on edge.

Conservative Chair Nahid Zahawi was sacked yesterday for serious breaches of the ministerial code following the furore over his tax affairs. Zahawi became the latest in a long line of Tory resignations and sackings, already the second in Rishi Sunak’s first three months in his premiership. Confidence in the Conservative government continues to wane, exerting pressure on Sterling once again.

Looking ahead, all eyes will be on the BoE rate decision on Thursday. With inflation remaining sky-high, far above the target rate of 2%, markets expect another 50bps hike. However, with the other major banks approaching their peak rates amid signs that price pressures are finally easing, the dire state the UK finds itself in could limit gains. A downbeat economic outlook could offset the possibility of the BoE to continue raising interest rates.

Euro (EUR) Pressured by Underwhelming German GDP Growth

Meanwhile, the Euro (EUR) is holding onto moderate strength this morning despite Europe’s largest economy Germany shrank QoQ in the latest GDP growth rate flash estimate.

Against an expected stagnation, the initial estimate for growth in Q4 came in lower than expected and printed at -0.2%. For YoY growth, the data also underwhelmed and only expanded 1.1% in Q4, missing expectations of a 1.3% growth. Destatis, who publishes the data, released an accompanying statement:

‘After the German economy managed to perform well despite difficult conditions in the first three quarters, economic performance slightly decreased in the fourth quarter of 2022.’

Looking ahead, and the recent hawkish rhetoric from the European Central Bank (ECB) has kept the momentum going ahead of the interest rate decision from the ECB. An expected 50bs rate hike from the central bank could be keeping EUR investors buoyed. However, concerning GDP growth in Germany could provide a warning ahead of the Eurozone GDP growth data. If the economy shows signs of weakness, pared rate hike bets could pull the Euro lower.

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