Pound Euro (GBP/EUR) Exchange Rate Sinks amid Dovish BoE Governor Bailey Speech

March 1, 2023 - Written by John Cameron

STORY LINK Pound Euro (GBP/EUR) Exchange Rate Sinks amid Dovish BoE Governor Bailey Speech

Pound Euro (GBP/EUR) Exchange Rate Sinks amid Dovish BoE Governor Bailey Speech

The Pound Euro (GBP/EUR) exchange rate weakened sharply during Wednesday’s session, following a dovish speech from Bank of England (BoE) Governor Andrew Bailey. In his speech, Governor Bailey implied that interest rates had peaked, leading to a sell off of the Pound.

At the time of writing, GBP/EUR traded at around €1.1263, and reflected a loss of around 1% from Wednesday’s opening rates.

Pound (GBP) Weakened by Dovish Bailey Speech

The Pound (GBP) weakened on Wednesday, following a speech from Bank of England (BoE) Governor Andrew Bailey.

Investors interpreted Governor Bailey’s speech as taking a dovish stance to interest rate hikes, as he reasserted the BoE’s data driven decision making policy.

In his speech, Governor Bailey stated: ‘At this stage, I would caution against suggesting either that we are done with increasing Bank Rate, or that we will inevitably need to do more. Some further increase in Bank Rate may turn out to be appropriate, but nothing is decided. The incoming data will add to the overall picture of the economy and the outlook for inflation, and that will inform our policy decisions.’

Furthermore, Bailey stated that he believed that inflation rates may have peaked, following ten successive increases. Because of this, GBP investors enacted a sell off for Sterling, prompting substantial weakness against most peers.

However, a bullish market mood may have prevented the Pound from further losses as Sterling seems to hold an increasingly risk sensitive nature.

Euro (EUR) Rallies on German Inflation

The Euro (EUR) rallied on Wednesday, following the release of February’s preliminary inflation data for Germany.

Analysts forecast that inflation would have fallen to 8.5% from 8.7%, but instead the data held ground. Because of this, EUR investors have begun to price in further tightening from the European Central Bank (ECB), which is serving to elevate the Euro against its peers.

Dr Joachim Nagel, a key ECB policymaker and President of the Deutsche Bundesbank, stated in a speech: ‘One thing is clear: the interest rate step announced for March will not be the last. Further significant interest rate steps might even be necessary afterwards, too. We naturally reassess the situation at every meeting. We are not locked into a given path. But, as things stand today, I believe that key interest rates need to be even higher in order to return the inflation rate to our 2% target in a timely manner.’

Nagel’s speech added further fuel to rate hike bets amongst EUR investors, allowing the safer currency to shrug off potential losses from the bullish market mood.

Pound Euro (GBP/EUR) Exchange Rate Forecast: EU Inflation in Focus

Looking ahead for the Euro, the core catalyst of movement is likely to be the latest Eurozone inflation data. February’s data is due to print on Thursday. At the time of writing, headline inflation is forecast to fall from 8.6% to 8.2%, while core inflation is forecast to remain at 5.3%.

At the same time, January’s unemployment rate for the Eurozone is due to print. This is forecast to hold at 6.6%, and may reflect a tight labour market.

If both data releases print in line with forecasts, European Central Bank (ECB) rate hike bets may increase due to core inflation remaining unmoved and the labour market remaining tight. As such, the ECB would have more room and impetus to hike interest rates, leading to support for the Euro.

For the Pound (GBP), the core catalyst of movement may be a speech from Bank of England (BoE) Chief Economist Huw Pill. Scheduled to speak on Thursday, if Pill strikes a hawkish tone towards inflation and implies further rate hikes, Sterling could strengthen.

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