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Pound to Euro Forecast: Will Rising Inflation Spur Central Banks into Action?

Bank of England

The Pound rallied against the Euro last week, starting at 1.13 on Monday before closing at a superior 1.15 on Friday.

These gains mainly came from a late-week Bank of England (BoE) interest rate decision, which saw Kristin Forbes as the sole vote for a rate hike.

Crucially, Forbes cited rising inflation as her reason for voting for a hike, a fact that has now tied rising inflation to rising chances of a BoE interest rate hike.

This outlook has been met with a mixed response by economists – the official BoE minutes implied that more policymakers might be voting ‘yes’ instead of ‘no’;

‘With inflation rising sharply and only mixed evidence on slowing activity domestically, some members noted that [it] would take relatively little further upside news on the prospects for activity or inflation for them to consider that a more immediate reduction in policy support might be warranted’.

Counteracting this apparent hawkishness was Guardian Economic Editor Larry Elliot;

‘With wage growth nugatory and Brexit talks about to begin, the City’s much-anticipated rate rise is still a way off. It certainly won’t happen this year’.

The first test of the inflation-to-rate hike odds relationship will come on March 21st with UK inflation rate figures for February.

Forecasts have been for an annual rise from 1.8% to 2.1% which would go above the BoE target of 2% and may trigger a Pound appreciation due to the implication for the BoE.

For a similar future influencer of the Euro, it bears watching the European Central Bank (ECB), particularly when in it comes to press conferences.

Annual Eurozone inflation hit 2% in February, which is also the ECB’s inflation rate target.

If this figure shows consistent growth over the year, the Euro may appreciate on each posting due to interest rate hike hopes. It is worth noting, however, the ECB officials like President Mario Draghi have been much more reluctant to consider raising rates than their counterparts in the UK.

Recently, ECB official Ewald Nowotny has stated that;

‘The ECB could raise the deposit rate earlier than the prime rate’.

This points to ECB interest rates remaining on ice for the foreseeable future, potentially even if inflation greatly exceeds the central bank’s target.

Recent GBP EUR Interbank Exchange Rates

At the time of writing, the Pound to Euro (GBP EUR) exchange rate was trading at 1.15 and the Euro to Pound (EUR GBP) exchange rate was trading at 0.86.