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Pound Euro Exchange Rate to Climb on Hawkish ECB Rate Hike?

Pound Coin on Euro Banknote GBP/EUR

GBP/EUR Exchange Rate Wavers ahead of ECB Rate Decision

The Pound Euro (GBP/EUR) exchange rate is fluctuating this morning ahead of the European Central Bank (ECB) interest rate decision.

At time of writing the GBP/EUR exchange rate is around €1.1674, relatively unchanged from this morning.

Euro (EUR) Quiet ahead of ECB Decision

The Euro (EUR) remains fairly subdue this morning as investors hedge their bets ahead of the interest rate decision from the ECB.

With ECB policymakers, including President Christine Lagarde, maintaining a hawkish stance towards forward guidance, EUR investors are expecting another 25bps raise. Lagarde had said that there was still ‘ground to cover’ when it came to bringing inflation back down to target. The hawkish comments shrugged off concerns over the fact that the Eurozone entered a winter recession.

Looking ahead, all eyes will be on the interest rate decision. If the ECB meet expectations of another 25bps rate hike, the onus will be on the post-meeting press conference. If Lagarde maintains her hawkish demeanour, the Euro could soar. However, recent weak economic data could temper those expectations, and a more cautious Lagarde could sap demand for the Euro.

The ECB has long held their policy of three criteria for deciding on the rate decision, with underlying inflation, incoming data, and how hikes are impacting the economy. With inflation not expected to fall to target before 2025, the Euro could remain supported on elevated rate hike bets.

Pound (GBP) Supported by Further Tightening Expectations

Meanwhile, the Pound (GBP) is holding onto its modest gains from elevated expectations of the Bank of England (BoE) continuing its aggressive rate hike cycle.

Expectations of the central bank to raise the interest rate for the 13th straight meeting could be keeping Sterling propped up amid a lack of economic data. Growing expectations of the terminal rate to reach 5.75% could be keeping GBP investors cheered.

Adding to this speculation was former Monetary Policy Committee member Sushil Wadhwani, as she warned of the dangers of out of control inflation:

‘Inflation ultimately is the enemy of growth. It’s very important for us to get inflation down if you want sustainable growth.

‘In that sense it’s important to continue administering the medicine, in the form of higher interest rates, notwithstanding the side-effects, because if we delay raising rates then we might find the disease gets worse and we might then find that we have to do even more and experience even worse side effects.’

Looking ahead, without any further data to go on before the close of the week, mounting expectations of the BoE to continue their relentless rate hike cycle could keep Sterling moderately supported heading into the weekend.

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