Pound Euro (GBP/EUR) Exchange Rate Muted amid ECB Guidance Confusion

April 17, 2023 - Written by John Cameron

STORY LINK Pound Euro (GBP/EUR) Exchange Rate Muted amid ECB Guidance Confusion

Pound Euro (GBP/EUR) Exchange Rate Muted amid ECB Guidance Confusion

The Pound Euro (GBP/EUR) exchange rate traded in narrow boundaries on Monday, as a lack of clarity over the European Central Bank’s (ECB) next rate hike decision left EUR with little inspiration.

At the time of writing, GBP/EUR traded at around €1.1297, and displayed little movement from Monday’s opening rates.

Euro (EUR) Muted amid Lack of Clarity in ECB Guidance

The Euro (EUR) traded narrowly during Monday’s morning session, as European Central Bank (ECB) policymakers lay out their cases for a larger or smaller hike at the May meeting.

Initially, EUR investors expected that a 50bps hike was on the cards, as inflation remains far beyond the ECB’s target rate. However, ECB Governing Council member Martins Kazaks has signalled the possibility of a smaller 25bps hike.

In an interview, Kazaks stated: ‘At some points, it’s only natural that the step size is reduced. For example, the increase could be not 50 basis points, but 25 basis points. Should we move to a lower step already at the ECB Council meeting in May? I think there is every possibility for that, but a 50 basis point increase is not an option that can be ignored.’

Because of the lack of clarity, EUR investors appear to be uninspired by his other comments which indicated strength in the Eurozone’s economy and room for continued hiking.

Furthermore, spirited trade during the morning session likely served to keep the Euro on the backfoot. As the currency is more of a safe haven option, it meant that any potential gains were capped.

Pound (GBP) Muted amid Bereft Data Calendar

The Pound (GBP) saw muted trade on Monday morning, as investors awaited key data releases later in the week.

With a lack of specific macroeconomic data available to give Sterling clear direction, investors and economists appeared to focus on whether the Bank of England (BoE) will continue hiking interest rates.

Currently, the market anticipates a 19bps hike in May at a minimum, but some analysts believe a pause could be on the cards.

James Smith, Developed Markets Economist at ING, commented: ‘Officials generally felt that the test had been met by the time of the March meeting, where they hiked rates by 25bp. Nevertheless, the data is clearly moving in the right direction, and we think barring some unwelcome – and unpredicted – surprises in next week’s data, the Bank will be comfortable in keeping rates at 4.25% on 11 May.’

Elsewhere, some modest support may have come Sterling’s way after a significant uptick in Business confidence. Deloitte’s quarterly poll of UK CFOs found that confidence has risen in the sharpest manner since the rollout of the Covid vaccine in late 2020.

Falling energy prices were indicated to be a significant reason, alongside easing supply chain and recruitment issues throughout the country.

Pound Euro (GBP/EUR) Exchange Rate Forecast: UK Employment Data in Focus

Looking ahead for the Pound (GBP), Tuesday brings the release of the latest unemployment rate and wage growth data. February’s unemployment rate is forecast by economists to hold at 3.7%, which could indicate that the UK’s labour market remains tight.

If this prints accurately, it may prompt elevated rate hike bets as it leaves room for a further hike from the Bank of England (BoE), which could strengthen Sterling.

On Wednesday, the UK’s latest consumer price inflation data is due to print. Both headline and core inflation are forecast to cool, which may alleviate some of the pressure on the BoE to continue hiking. However, as headline inflation is expected to remain well above the target of 2%, it may reinforce the need for a final hike in May and cushion GBP.

For the Euro (EUR), Tuesday brings the publication of ZEW’s latest economic sentiment index, reflecting April’s economic outlook in Germany.

This index is forecast to increase to 15.1, up from 13. This increased level of optimism could bring a boost to the Euro, as the bloc’s largest economy continues to show signs of recovering after a rocky start to the year.

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TAGS: Pound Euro Forecasts