Updated 16:46 BST 14/09/2017:
Sterling soared across the board on Thursday afternoon, as investors reacted to a more hawkish than expected Bank of England (BoE) meeting minutes report.
While the bank left monetary policy frozen as expected, the bank’s meeting minutes surprised traders.
The minutes indicated that if the UK economy continued to beat the bank’s expectations, the bank could hike rates faster than markets expect.
Even Bank of England Governor Mark Carney stated on Thursday evening that the possibility of a rate hike had risen.
As a result, the Pound Euro exchange rate surged to its best levels since July and investors are slightly more optimistic about more Pound recovery in the coming months.
[Published 10:29 BST 14/09/2017]
The Pound Euro exchange rate has trended relatively flatly near its highest levels in a month for most of the week, thanks to market anticipation for the upcoming Bank of England (BoE) policy decision.
GBP EUR began the week trending at around 1.0963 and has since advanced to highs near 1.1128.
Pound (GBP) Investors Await Bank of England (BoE) News
The Pound surged in demand on Tuesday, following the publication of Britain’s August Consumer Price Index (CPI) results.
While the undervalued Pound was already edging away from its lows recently, this news gave Sterling the boost it needed to recover considerable ground against major rivals like the Euro.
UK inflation was forecast to rise from 2.6% to 2.8% year-on-year in August, but instead came in at 2.9%. The monthly inflation rate beat 0.5% forecasts and rose from -0.1% to 0.6%.
The higher-than-expected inflation results caused Bank of England (BoE) speculation to flare up. Hawkish traders are hoping the bank will now feel more pressure to tighten UK monetary policy from its loosest levels.
Sterling was weighed slightly by Wednesday’s UK employment data from the three months into July. Poor wage growth stats indicated the ongoing pay squeeze was far from over.
Still, the Pound’s dip against the Euro was brief due to Bank of England anticipation. If the bank does indeed take a more hawkish stance on UK monetary policy, GBP EUR is likely to surge in the coming days.
On the other hand, the bank could continue to indicate that it will overlook strong inflation, if British monetary policy needs to remain accommodative due to economic uncertainties.
Any changes in the number of policymakers voting for an interest rate hike is also likely to inspire the Pound. Either way, this BoE decision will be the biggest cause for GBP EUR movement towards the end of the week.
Overvalued Euro (EUR) Sold from Highs
Investors have had little reason to continue buying the strong Euro this week.
September’s European Central Bank (ECB) policy decision was relatively optimistic, with ECB President Draghi stating that decisions on quantitative easing (QE) will be announced in October.
However, bank officials have since indicated that the strong value of the Euro could impact the bank’s decisions on other monetary policy, like interest rates, in the long-term.
The latest warnings were issued by ECB Chief Economist, Peter Praet. Praet noted that Eurozone inflation was volatile and still filled with uncertainties.
Low inflation for longer, either due to Euro strength or subdued inflationary pressures in the bloc, would support the bank’s cautious stance on things like interest rates.
Uncertainty about the ECB’s long-term outlook has prevented the Euro from benefitting from strong Eurozone data in recent sessions.
The Eurozone’s employment change data for Q2 beat expectations, but as August inflation stats from Germany, Spain, France and Italy all generally met projections the Eurozone inflation outlook was unchanged.
Looking ahead, the Euro outlook is likely to be influenced by Monday’s upcoming Eurozone inflation report from August. If the figures surprise analysts the Euro could react.
Markit’s September PMI estimations for the Eurozone will begin to come in next week too. However, without a strong reason to buy the Euro again investors could continue to sell the overvalued currency from its recent highs.
GBP EUR Interbank Rate
At the time of writing this article, the Pound Euro exchange rate trended in the region of 1.1086. The Euro to Pound exchange rate traded at around 0.9018.