Pound Euro Exchange Rate News: GBP/EUR Muted as GBP Investors Price in Next Interest Rate Hike

October 28, 2022 - Written by John Cameron

STORY LINK Pound Euro Exchange Rate News: GBP/EUR Muted as GBP Investors Price in Next Interest Rate Hike

GBP/EUR Exchange Rate Sluggishness Caused by Cautious Investors

The Pound to Euro (GBP/EUR) exchange rate was directionless on Friday afternoon as a lack of UK data saw GBP investors speculating about the Bank of England’s (BoE) next interest rate decision.

At time of writing the GBP/EUR exchange rate traded at around €1.1593, which was roughly the same as Friday’s opening levels.

Pound (GBP) Mixed as Investors Price in Low BoE Hike

The Pound (GBP) traded in a broad range on Friday afternoon as a light data calendar saw investors focus on the BoE’s interest rate decision next week.

Until recently GBP investors were hoping for a 75bps rise in November’s policy meeting. However, a delay on the government’s forthcoming fiscal plan means the central bank will have no insight into the government’s policy plans and no budget forecasts. As such, investors are now readjusting their expectations, pricing in a lower interest rate hike and undercutting the Pound in the process.

That said, Sterling remained underpinned by the arrival of the new Prime Minister, Rishi Sunak. Many investors have reacted positively to Sunak’s appointment, confident in his financial background.

Bill Diviney, Senior Economist of Untied States at Group Economics, said:

‘The silver lining to the political chaos is that the worst of the crisis in financial markets – and therefore the risks to the economy – now looks to be behind us.’

Euro (EUR) Bolstered by Positive German GDP Figures

The Euro (EUR) was trading narrowly with GBP, but was up against many of its other peers on Friday, as German GDP printed better than expected.

Europe’s largest economy unexpectedly grew by 0.3% in Q3, rather than contracting by 0.2%. In a statement, the statistics office said the country had beaten the odds:

‘The German economy ... continued to hold its own despite difficult global economic conditions with the ongoing COVID pandemic, disrupted supply chains, rising prices and the war in Ukraine’.

However, the single currency’s gains were limited somewhat by restrictive rhetoric from the European Central Bank (ECB). Central banks are becoming more concerned with the impact higher interest rates will have in the long term.

As such the ECB has become the latest central bank to signal it’ll reduce the aggressiveness of its interest rates. In a speech given on Friday, ECB policymaker Francois Villeroy de Galhau said that there is:

‘no obligation to raise rates by 75bps at the December meeting.’

GBP/EUR Exchange Rate Forecast: Mixed Eurozone Data to Create Headwinds for EUR?

Turning to next week the Pound Euro exchange rate could be uplifted by poor Eurozone data.

The GDP growth rate for the eurozone is expected to slow on Monday. If this prints as true then it could hurt the Euro amid fears of a sharp economic slowdown.

Meanwhile, Eurozone inflation is forecast to ease from 9.9% to 9.8%, which could further dampen ECB rate rise bets and see EUR slip further. If inflation unexpectedly rises, the Euro could firm.

Looking at the Pound, rate hike bets will likely continue to underpin movement as investors await the BoE decision on Thursday. A less aggressive hike could dent GBP. However, with lingering fears about the UK’s financial stability, there could be some mixed movement either way.

In the meantime, Sterling will likely continue to be driven by domestic headlines, with particular focus on political developments.

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Pound Euro Forecasts