Pound Euro (GBP/EUR) Exchange Rate Slips amid UK Economy Concerns
The Pound Euro (GBP/EUR) exchange rate has continued this week’s decline today as UK economic woes pile up. At the time of writing, GBP/EUR is trading at around €1.1313, a drop of around 0.75% since the start of this week’s session.
Looking ahead, the interest rate decisions from the Bank of England (BoE) and the European Central Bank (ECB) are in focus. Could a hawkish ECB and a dovish BoE see GBP/EUR plunge?
Pound (GBP) to Slide following Dovish BoE?
The Pound (GBP) is on the back foot today as recession fears continue to cast a shadow over GBP exchange rates.
Adding to the UK’s economic woes, industrial action continues to intensify. Today around half a million workers in travel, education and the civil service are striking. The economic disruption and political unrest are weighing on the Pound.
The focus moving forward is the Bank of England interest rate decision tomorrow at noon. Markets expect the BoE to deliver another half-point hike, however there is speculation that the bank could be close to ending its tightening cycle.
If the BoE signals a slower pace of rate rises moving forward – or even a pause altogether – Sterling could slide.
On the other hand, some economists believe that the BoE will upgrade its economic forecasts for the UK. As gas prices have declined and conditions in the financial markets have stabilised, a more upbeat outlook could limit GBP’s losses.
Euro (EUR) to Firm as ECB Signals More Hikes Ahead?
Meanwhile, the Euro (EUR) hit a one-week high against the weakening Pound today.
The upside came despite a softer-than-expected Eurozone CPI. Inflation in the bloc eased from 9.2% to 8.5% – a far sharper slowdown than the forecast fall to 9%.
This may partially dent rate rise expectations ahead of the ECB decision, which also takes place tomorrow. Again, analysts expect a 50bps rate rise.
However, the European Central Bank has been giving mixed messages recently. Many policymakers have insisted on the need for multiple half-point hikes moving forward, while there are reports that ECB doves are pushing for a slower pace of policy tightening after tomorrow’s meeting.
It seems more likely that the ECB will choose to ‘stay the course’, as the bank’s President Christine Lagarde put it in a recent speech. Such an event would probably boost the Euro, sending GBP/EUR sliding.
Yet there is a possibility of a more dovish tilt from the ECB. If it backpedals on the need for further 50bps rate rises, perhaps by saying that future decisions will be ‘data-dependent’, EUR could stumble.