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Pound Euro (GBP/EUR) Exchange Rate to Slide on Dovish ECB?

European Central Bank

Pound Euro Exchange Rate to Climb on Central Bank Decisions?

The Pound Euro (GBP/EUR) exchange rate is trading level this morning ahead of announcements from the Bank of England (BoE) and the European Central Bank (ECB).

At the time of writing, GBP/EUR is trading at €1.1754, virtually unchanged from today’s opening levels.

Euro (EUR) to Tumble on Dovish ECB Announcement?

The Euro (EUR) is falling against the majority of its peers this morning ahead of today’s interest rate decision, as German and Eurozone PMIs print mixed. The European Central Bank is expected to keep interest rates on hold later, while announcing intentions to terminate PEPP on schedule.

Exerting dovish headwinds, ECB officials are also forecast to reveal plans for raising Asset Purchase Programme (APP) investment. Analysts at Nordea Bank observe:

‘The ECB will probably boost the APP as net PEPP ends, but it is far from certain that it is ready to make the detailed decision next week.’

Although the ECB is known for its dovish policy in relation to other central banks, today’s decision is still likely to weigh upon the single currency if officials strike an overly cautious tone.

Inflationary pressures are rising across the bloc, with the cost of living having risen by 4.9% in November; meanwhile, the central bank maintains that inflation is transitory.

The case for addressing soaring prices across the energy sector, services and industrial goods is countered at present by rising cases of the Covid Omicron variant and subsequent economic uncertainty, which, according to Dirk Schumacher, an ECB watcher with Natixis:

‘-has complicated the picture to an extent that the Governing Council may need more time to decide on all the details of adjusting its non-conventional policy tools.’

Pound (GBP) to Face Downside if BoE Resist Rate Hike?

The Pound (GBP) is trading down against several peers this morning as the UK’s services PMI misses expectations.

Investors remain braced for this afternoon’s interest rate decision: bets of a December rate hike have been largely discounted, although economists observe that significant motivation remains.

As fuel prices rise at the fastest rate on record and the cost of food, clothing, and second-hand cars soars, Janine Boschoff, an economist at the National Institute of Economic and Social Research, predicts that inflation is likely to remain above 5% throughout the first half of 2022.

Nevertheless, the uncertainty caused by the spread of the Omicron coronavirus variant and the economic impact of the pandemic compel the BoE to leave rates on hold.

Silvia Dall’Angelo, senior economist at the International Business of Federated Hermes, says:

‘Overall, it makes sense for the Bank of England to keep rates on hold at its upcoming meeting, avoiding rattling markets just before the liquidity-light holiday period.’

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