GBPEUR Higher but BoE Governor Warns of Inflation

GBP EUR Starts the Week with 1.1800 Test

The GBPEUR exchange rate was trading 0.15% higher on Tuesday at 1.1680 as the pound continues to push higher against the euro. Bank of England (BoE) warned of rising inflation yesterday after market were recently spooked by rising bond yields.

Economic data is light for the pound to euro rate ahead of the European Central Bank (ECB) interest rate announcement on Thursday. The European Central Bank may look to cool the recent move higher in bond market yields.

Bailey Sees Inflation Pressures with Reopening

The Bank of England’s Governor Andrew Bailey has warned of inflationary pressures in the months ahead. In a virtual event hosted by the Resolution Foundation, Bailey noted that inflation would rise as fuel price cuts from a year ago fell out of the annual calculation. Despite this move, and the pressure on prices from reopening, Bailey suggested that any action would come later, saying:

“For the moment, I would say… our task is to get inflation up to target, frankly and hold it there.”

The BoE said last month that the UK economy would contract by 4% in the first three months of 2021, before bouncing back in the rest of the year and reaching its pre-virus levels of growth by the first quarter of 2022.

Mr Bailey said he was positive, but cautious on the recovery, while he also said that the furlough scheme would still see higher unemployment when it ends.

Minor Data Releases Due Before ECB Meeting

Today will see some data for the European economy with Italian industrial production and a revision of fourth quarter Eurozone GDP data. These are unlikely to have any effect on the market and we are in a waiting game for Thursday’s ECB interest rate announcement.

The central bank is unlikely to act on rates, but they could enhance their bond buying efforts to cool bond yields. Global bonds have been the subject of a sell-off in the last few weeks and this threatened the recovery in developed nations. ECB member, and head of open market operations, Isabel Schnabel stated that “a rise in real long-term rates at the early stages of the recovery, even if reflecting improved growth prospects, may withdraw vital policy support too early and too abruptly given the still fragile state of the economy”.

The bank’s Chief Economist Philip Lane also said that the bank will use its PEPP bond buying program to limit any unwanted rise in yields. The market will be looking for remarks form ECB Chief Christine Lagarde on Thursday and we may see a token move to purchase more bonds in an effort to scare off anyone who wants to push yields higher.

The GBPEUR rate may remain quiet until the ECB meeting but the recent highs at1.1700 are close and we may see action around that level. You can get in touch to discuss an upcoming currency exchange, and how it could be impacted by the above factors, using the form below.