The Pound (GBP) has dropped against the Euro (EUR) today, following a pair of Pound-weakening Bank of England (BoE) statements.
The UK central bank hiked interest rates from 0.5% to 0.75% on Thursday, but BoE Governor Mark Carney has disappointed traders with his cautious tone.
As well as suggesting that a bad Brexit deal could lead to an interest rates cut, Mr Carney added that the odds of a ‘no-deal’ Brexit are ‘uncomfortably high’.
(Last updated 3rd August, 2018)
Chance of GBP/EUR Exchange Rate Rally on BoE Interest Rate Hike
This meeting of BoE policymakers has the chance to bring major gains for the Pound, should BoE officials choose to raise interest rates from 0.5% to 0.75%.
Economists and GBP traders alike are pricing in this decision as almost assured, but it is worth noting that there could still be another disappointing interest rate freeze.
Even if a rate hike does take place, it is possible that GBP/EUR exchange rate gains will be limited because of a cautious attitude from BoE policymakers.
Focusing on this aspect of the BoE event, ING Developed Markets Economist James Smith says:
‘We think the BoE will increase interest rates this week. But the key thing to watch is what the Bank has to say on its next steps.
‘In an ideal world, we think policymakers would like to hike rates again much sooner than markets are currently pricing (towards the end of 2019).
‘But with Brexit uncertainty considerably ramping up, realistically we think the Bank will struggle to raise rates again before the UK leaves the EU next March.
‘After Thursday, we currently don’t anticipate another hike before May 2019.’
Risk of Euro to Pound (EUR/GBP) Exchange Rate Losses on Slower Services Activity
On the Euro (EUR) side of the currency pairing, there could be losses against the Pound (GBP) on Friday when additional Eurozone PMI data is released.
This will consist of July’s finalised composite and services sector readings, which are predicted to show a slowdown in activity on both counts.
Later Eurozone retail sales data might cause additional losses for the single currency, if it shows a minimal rise in monthly reported sales from 0% to 0.4%.
Annual sales are expected to remain static at 1.4%, which could provide little support for the single currency during Friday’s trading.
Future EUR/GBP Exchange Rate Forecast: Are Euro Gains ahead on German Trade Data?
The Euro (EUR) might be able to advance against the Pound (GBP) in the week ahead when German trade balance data is released on the coming Tuesday.
This is expected to show an expansion of Germany’s already considerable trade surplus in June, with an increase from €19.7bn to €24.5bn.
A larger trade surplus could reassure Euro traders about the strength of the Eurozone’s largest economy and lead to a EUR/GBP exchange rate rise.
Although a growing German trade surplus could support the Euro on Tuesday, EUR/GBP gains could be limited if German industrial output data disappoints.
Also out on Tuesday morning, this is predicted to show a considerable slowdown in output levels during June with a shift from 2.6% down to 0.3%.
German factory output is a key component of continued national economic growth and if it looks like activity is slowing then Euro to Pound gains may be restricted.