Pound Euro (GBP/EUR) Exchange Rate Dips despite Elevated BoE Rate Hike Bets

June 12, 2023 - Written by John Cameron

STORY LINK Pound Euro (GBP/EUR) Exchange Rate Dips despite Elevated BoE Rate Hike Bets

Pound Euro (GBP/EUR) Exchange Rate Dips despite Elevated BoE Rate Hike Bets

The Pound Euro (GBP/EUR) exchange rate weakened on Monday, despite GBP investors upping their bets on further rate hikes from the Bank of England (BoE).

At the time of writing, GBP/EUR traded at around €1.1679, a fall of just over 0.2% from Monday’s opening rates.

Pound (GBP) Muted despite Elevated Rate Hike Bets

The Pound (GBP) saw muted trade during Monday’s European session, but was likely cushioned from significant losses by elevated interest rate hike bets.

These may have been further prompted by comments made early on Monday by Bank of England (BoE) policymaker Jonathan Haskel, who suggested more rate hikes may be needed.

In The Scotsman, Haskel wrote: ‘We are monitoring indicators of inflation momentum and persistence closely. My own view is that it’s important we continue to lean against the risks of inflation momentum, and therefore that further increases in interest rates cannot be ruled out. As difficult as our current circumstances are, embedded inflation would be worse.’

Markets had begun to price in 100bps of additional interest rate hikes over the remainder of 2023, which is likely serving to keep Sterling afloat despite a lack of impactful data releases.

Elsewhere, upbeat trade across markets may have brought further cushioning to Sterling. As the Pound holds an increasingly risk sensitive nature, increased risk appetite likely led to some element of support.

Euro (EUR) Strengthens on Weakening US Dollar

The Euro (EUR) gained ground on Monday, as a cheery market mood supported the single currency despite a lack of impactful data releases.

The increase in risk appetite weighed on the US Dollar, which in turn allowed the Euro to gain ground due to the pairing’s negative correlation.

Elsewhere, the Euro could be seeing additional support from elevated interest rate hike bets, ahead of the European Central Bank’s (ECB) decision later in the week.

The ECB are widely expected to hike rates by another 25bps points as they move to prevent inflation from becoming entrenched.

However, while the cheery trade may have allowed the common currency to gain ground, its strength may have been capped by its nature as a safer currency.

Pound Euro (GBP/EUR) Exchange Rate Forecast: UK Unemployment Uptick to Dent GBP?

Looking ahead for the Pound (GBP), the core catalyst of movement is likely to arrive on Tuesday, wherein the latest unemployment data is released.

The UK’s unemployment rate is forecast by economists to have edged higher to 4% in May, which could weigh on Sterling by pointing to a cooling labour market, which would in turn dampen prospects of additional tightening from the Bank of England.

However, the latest wage growth data accompanies this release, and could muddy the waters. Both average earnings including and excluding bonuses figures are forecast to tick upward, which may point to a need for further rate hikes. The BoE has consistently pointed to wage growth as a key inflationary pressure.

On Wednesday, the latest UK GDP data is due to print. An expansion of 0.2% is forecast for April, which could boost Sterling by pointing to resilience in the UK economy.

For the Euro (EUR), tomorrow brings the release of the latest ZEW economic sentiment index for Germany. In June, the index is forecast to slip to -12.7 from -10.7.

This could weigh on the single currency by signalling growing pessimism within the bloc’s largest economy, which may darken the wider Eurozone economic outlook.

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TAGS: Pound Euro Forecasts