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Pound Euro Exchange Rate to Soar on Hawkish BoE?

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GBP/EUR Exchange Rate Wavers as Markets Brace for BoE Interest Rate Decision

The Pound Euro (GBP/EUR) exchange rate is fluctuating as investors expect the Bank of England (BoE) to raise the interest rate to the highest level since 2008.

At time of writing the GBP/EUR exchange rate is around €1.1513, relatively unchanged from this morning’s levels.

Pound (GBP) Quiet ahead of Interest Rate Decision

The Pound (GBP) is trading with mixed success this morning as investors move to the sidelines ahead of the interest rate decision at midday today. With expectations of a 12th consecutive hike, bringing the cash rate to 4.5%, borrowing costs will reach a height not seen since October 2008.

Despite the high probability of another 25bps increase, investors will be looking at the vote split within the Monetary Policy Committee (MPC). With inflation remaining stubbornly high at 10.1%, far above the BoE’s target rate of 2%, and still above the central bank’s own inflation expectations, further tightening is on the table.

Looking ahead, the press conference from BoE Governor Andrew Bailey could prove more impactful than the interest rate decision. Core inflation is also proving ‘sticky’, the latest wage data printed stronger than expected, and the economy is surprisingly resilient, bolstering expectations that the central bank will have no choice but to continue tightening. Attention will turn to comments from Bailey. RBC Capital Markets, said of the situation in a note to its clients:

‘The MPC (Monetary Policy Committee) is likely to exhibit a relatively hawkish tone and retain optionality over the direction of policy going forward, including avoiding any reference, explicit or otherwise, to pausing its tightening cycle.

‘The economy is performing better than expected, the labour market shows little sign of loosening and (perhaps most importantly) inflation is not falling as quickly as expected.’

Euro (EUR) Subdued amid Mixed Market Mood

Meanwhile, the Euro (EUR) is also struggling for sustained demand amid a lack of economic data. Uncertainty surrounding the European Central Bank’s (ECB) monetary policy could also be keeping a lid on any gains in the wake of a dovish hike last week.

The negative correlation the Euro shares with the US Dollar saw renewed demand in the wake of cooler-than-expected US inflation data. However, with wavering market sentiment providing safe-haven flows once more, the single currency lost demand.

Looking ahead, speeches from European Central Bank (ECB) could inspire further movement with the Euro. ECB Executive Board Member Isabel Schnabel, one of the central bank’s most hawkish members, could rally the Euro if talks of further tightening come up. Yesterday, Schnabel commented on monetary policy, adding:

‘Based on today’s data, there is no doubt that we need to do more to bring inflation back to our 2% target in a timely manner. We will raise interest rates until there are signs that core inflation will fall on a sustained basis.’

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