Pound Euro Exchange Rate News: GBP/EUR Wavers on Hawkish ECB rate Hike

June 15, 2023 - Written by John Cameron

STORY LINK Pound Euro Exchange Rate News: GBP/EUR Wavers on Hawkish ECB rate Hike

Euro (EUR) Buoyed by Prospect of Further Tightening

The Euro (EUR) enjoyed modest gains on Thursday in the wake of the European Central Bank (ECB) opting to meet market expectations and raise the interest rate for the eighth consecutive meeting. The cash rate now sits at 4%, the highest level since the financial crisis of 2008.

Despite the fact that the Eurozone entered a technical recession, both inflation and core CPI remain far above the ECB’s target rate of 2%, the ECB did not feel it was time to pause. Further bolstering the Euro against its rivals were upwardly revised inflation forecasts.

In the post-meeting press conference, ECB President Christine Lagarde maintained her hawkish stance and reiterated that the central bank still has a lot of ground to cover to bring inflation down. Strong hints that the ECB could raise interest rates again in July also boosted the Euro. However, the central bank have already raised the cash rate by 400 basis points, signalling the fastest pace of tightening in the history of the ECB. Lagarde said:

‘The key ECB interest rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary.

‘Inflation has been coming down but is projected to be too high, for too long.’

Pound (GBP) Supported by Elevated BoE Rate Hike Bets

Meanwhile, the Pound (GBP) held onto gains from elevated interest rate hike bets from the Bank of England (BoE) amid a lack of economic data. With market participants now predicting the central bank will keep raising the interest rate to 5.75% by the end of the year, GBP investors remain buoyed.

A 13th consecutive rate hike at the next meeting in June could see borrowing costs exceed the highest levels seen in 2008. But the dangers of inflation far outweigh surging borrowing costs, according to former BoE monetary Policy Committee (MPC) member Sushil Wadhwani:

‘Inflation ultimately is the enemy of growth. It’s very important for us to get inflation down if you want sustainable growth.

‘In that sense it’s important to continue administering the medicine, in the form of higher interest rates, notwithstanding the side-effects, because if we delay raising rates then we might find the disease gets worse and we might then find that we have to do even more and experience even worse side effects.’

GBP/EUR Exchange Rate Forecast: Softening Eurozone Inflation to Dent the Euro?

Looking ahead, the Pound Euro exchange rate could see further movement with the release of the latest Eurozone inflation data. If the headline CPI rate falls further than expected, gains from a hawkish forward guidance could soon fade.

Meanwhile, the Pound will have to rely on market sentiment and elevated rate hike bets of their own for support heading into the weekend amid a lack of economic data.

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TAGS: Pound Euro Forecasts