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To Cut or Not to Cut? GBP/EUR Exchange Rate in the Balance as BoE Rate Decision on a Knife Edge

Bank of England

GBP/EUR Exchange Rate Muted Ahead of BoE Rate Decision

The Pound to Euro (GBP/EUR) exchange rate is trading in a narrow range this morning as markets brace for the Bank of England’s (BoE) latest policy decision on Thursday.

At the time of writing the GBP/EUR exchange rate is trading at around €1.1829, virtually unchanged from this morning’s opening rate.

How Might the Pound (GBP) React to the BoE’s Rate Decision?

The Pound (GBP) is currently hanging in the balance as the BoE’s Monetary Policy Committee (MPC) faces the difficult question of whether to cut interest rates this month.

CME’s BoE Watch tool currently places the odds of a rate cut at roughly 50-50, with the uncertainty of the bank’s decision likely to infuse some volatility into Sterling tomorrow.

Robert Wood, chief UK economist at Bank of America suggests that while Thursday’s decision is ‘finely balanced’ he expects the BoE to opt for a rate cut this month:

‘We had thought that the MPC might wait until a few months after the general election, or the chancellor’s first Budget, to make a decision on interest rates.’

‘But it seems as though they might want to offer a helping hand to the economy a bit sooner than expected.’

Conversely, James Smith, an economist at ING believes the base case is for the BoE to leave rates on hold this month, but with a clear split between MPC members:

‘We think the Bank of England will opt against cutting interest rates this month. We suspect we’re likely to get either a 6-3 or 5-4 vote in favour of keeping rates on hold when the Bank announces its decision next week.’

In the event that the BoE ultimately opts to cut interest rates tomorrow we expect the Pound to face some headwinds, with the GBP/EUR exchange rate likely testing the waters at €1.17.

Could an Upbeat GDP Reading Bolster the Euro (EUR)?

Meanwhile, the main catalyst of movement in the Euro (EUR) through the latter half of the week will be the publication of the Eurozone’s fourth quarter GDP print.

The current market consensus is that growth in the bloc will have continued to expand by a modest 0.2% through the latest quarter of 2019.

However, some economists are more optimistic, forecasting that easing trade tensions and a slightly brighter global outlook will see the Eurozone economy expand by 0.3%, potentially offering some support to the Euro on Friday.