Pound Euro Exchange Rate News: GBP/EUR Slumped as the BoE Raised Interest Rates by 50bps

February 2, 2023 - Written by John Cameron

STORY LINK Pound Euro Exchange Rate News: GBP/EUR Slumped as the BoE Raised Interest Rates by 50bps

Pound (GBP) Soured as BoE Continues its Battle with Inflation

The Pound (GBP) plummeted on Thursday in the wake of the Bank of England (BoE) interest rate decision. Despite the expected increase by 50bps, the dire state of the UK economy limited gains from a continued aggressive rate hike cycle.

A weak economy, combined with sky-high inflation didn’t leave the BoE much room to negotiate. As price pressures remained elevated, the central bank was left with little choice but to continue their ascent. Compared to most other central banks who are preparing to slow or pause their tightening cycles, the BoE Monetary Policy Committee (MPC) voted seven to two for an increase.

The accompanying policy statement, combined with a less divisive vote split, limited Sterling’s losses. The MPC had agreed that the BoE would continue its tightening cycle if pressures remained, and had hopes that inflation had in fact peaked, and the economy will enter a recession this year. However, the BoE expects it to be shorter and milder. The statement read:

‘Global consumer price inflation remains high, although it is likely to have peaked across many advanced economies, including in the United Kingdom.

‘Wholesale gas prices have fallen recently, and global supply chain disruption appears to have eased amid a slowing in global demand. Many central banks have continued to tighten monetary policy, although market pricing indicates reductions in policy rates further ahead.’

Euro (EUR) Strengthened ahead of the ECB Rate Decision

Meanwhile, the Euro (EUR) held on to gains as investors braced for the European Central Bank (ECB) interest rate decision. With inflationary pressures easing, and a resilient economy, EUR investors are much more confident in the central bank’s movements.

An expected hawkish tone from the ECB could send the single currency higher. Following on from ECB President Christine Lagarde’s surprisingly hawkish comments of late, EUR investors will be keen for a continuation of the central bank’s commitment to tackling inflation with further rate hikes.

GBP/EUR Exchange Rate Forecast: ECB Rate Decision to Bolster the Euro?

Looking ahead, the Pound Euro exchange rate could see further fluctuations, and an even weaker Pound, if the ECB continues its hawkish rhetoric. An expected 50bps rate hike has buoyed investors, but the prospect of further bumper hikes could also lift the Euro higher. The accompanying monetary policy statement will be closely scrutinized.

Meanwhile, the Pound will be left to dwell on the interest rate decision and the subsequent press conference. The bleak economic outlook will hardly inspire much hope in investors, but tempered recession fears could limit the downside.

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TAGS: Pound Euro Forecasts