Pound Euro Exchange Rate News: GBP/EUR Nosedives as BoE Warns of Two-Year UK Recession

November 3, 2022 - Written by John Cameron

STORY LINK Pound Euro Exchange Rate News: GBP/EUR Nosedives as BoE Warns of Two-Year UK Recession

GBP/EUR Exchange Rate Plunges as BoE Forecasts Rattles Markets

The Pound to Euro (GBP/EUR) exchange rate plummeted on Thursday in the wake of the Bank of England’s (BoE) key interest rate decision.

At time of writing the GBP/EUR exchange rate traded at around €1.1457, down roughly 1.2% from Thursday’s opening levels.

Pound (GBP) Plummets Following BoE Interest Rate Decision

The Pound (GBP) dropped sharply against the majority of its peers on Thursday afternoon, following the= Bank of England’s (BoE) latest interest rate decision.

The bank raised rates by 75bps as expected. This was the largest hike in 33 years and brought UK interest rates up to a staggering 4%, far surpassing the bank’s goal of 2%.

However, the Rate hike was overshadowed by the BoE’s accompanying forecasts for the UK economy.

The BoE warned the UK is already likely in a recession and that growth is likely to remain negative until mid-2024, the UK’s longest downturn on record.

The Pound was also pressured by comments from BoE Governor Andrew Bailey, in which he suggested markets had been too aggressive in pricing in future interest rate hikes.

Bailey, said:

‘We can’t make promises about future interest rates, but based on where we stand today we think Bank Rate will have to go up by less than currently priced in financial markets’.

Euro (EUR) Mixed amid Russia-Ukraine War Developments

The Euro (EUR) was trading in a broad range on Thursday as investors focused on Ukrainian war headlines.

Russia continued to target Ukraine’s infrastructure in an attempt to weaken resistance. Drone strikes were carried out on Dnipropetrovsk overnight and the Zaporizhzia nuclear power plant causing blackouts.

In an update on Thursday the mayor of Energodar, Dmytro Orlov said:

‘Yesterday, November 2, 2022, as a result of racist shelling, the last two high-voltage communication lines of the Zaporizhia NPP with the Ukrainian power system were damaged. At 11:04pm, the station went into full blackout mode. All 20 diesel generators were switched on.’

The plant can run for 15 days in blackout mode. Russian forces are already working on switching the plants jurisdiction in their favour. This is an attempt to further destabilise the EU’s power supply and add more strain on the Euro.

However, the Euro’s losses were limited somewhat by Vladimir Putin’s U-turn on Thursday. The Kremlin has decided to restart the export of grain via Ukraine in what President Volodymyr Zelenskiy has called a ‘failure of the Russian aggression’.

Russia’s threat to stop exports stoked concerns over higher food prices across the EU. Ukraine is one of the largest grain exporters in Europe, so Putin’s reversal eased concerns and helped underpin the single currency.

GBP/EUR Exchange Rate Forecast: GBP to Become Volatile as Markets Adjust?

Looking ahead, the Pound Euro exchange rate could be driven by the fallout following the BoE’s interest rate decision.

UK data is thin on the ground on Friday, meaning investors will likely continue to adjust in the aftermath of Thursday’s hike. Many investors seem uncertain about the BoE’s future plans for interest rate rises, with conflicting reports on how high rates will climb. As such, any comments made by the bank during latter week trade could infuse much volatility into Sterling.

Turning to Europe, President of the European Central Bank (ECB) Christine Lagarde is expected to give a speech on Friday. EUR investors will be looking for any hints about future ECB interest rate decisions. The Euro could enjoy tailwinds if Lagarde strikes a broadly hawkish tone.

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TAGS: Pound Euro Forecasts