Pound to Euro Awaits ECB Rate Decision for the Next Path

Pound to euro Awaits ECB Rate Decision for the Next Path

The pound to euro exchange rate was higher on the week with a close above the 1.1600 level after the latest UK Budget. Pound bulls shrugged off the announcement of higher taxes in the years ahead to keep sterling bid. The European Central Bank now meets on Thursday to announce its latest rate decision.

Bond yields have been moving higher in the developed nations as they toil with big government debts and the European Central Bank (ECB) may make additional moves to cool rates.

Pound Bulls Shrug off Sunak Budget

Rishi Sunak’s Budget on Wednesday was largely expected as the finance minister was reprimanded by Lindsey Hoyle for leaking key parts of the plan. The Chancellor has decided to raise corporate taxes to 25% in 2022 and freeze income tax thresholds into 2026 in order to plug a £400 billion gap in government spending.

The Chancellor also announced some goals aimed at positioning the country for future competitiveness with the creation of eight freeports in England and friendly business arrangements to entice technology companies.

The market is now keeping sterling supported as hopes build for a swift reopening of the economy. Pubs in the UK are reporting an early swarm of bookings for beer gardens to meet the April 12th reopening date. Industry group UK Hospitality said that a single pub in Leeds had taken 700 bookings in five hours this week.

The UK is also set to allow flights abroad in May and Cyprus were the first to open its borders to the UK this week with talk of a Spanish flight corridor.

ECB Could Announce Additional Bond Buying

The European Central Bank will meet on Thursday to announce its latest monetary policy and interest rate decision and the bank may increase bond purchases.

Bond yields have been rising with the key US 10-yr benchmark at 1.5% and UK gilts moving from 0.5% to 0.75% over the last year. As governments pile on debt, a rise in rates would increase their repayments to eye-watering levels and threaten the recovery. This is likely to see the ECB announce additional bond buying to cool rates, but also to warn those that seek to push yields higher.

The ECB has been buying an average of 15 billion in government debt per month and they push this higher to around 20 billion to make an initial statement, with additional comments to restate the “whatever it takes” commitment to keeping yields low.

Inflation expectations have been rising in markets and the inflationary picture has also picked up in Europe, so traders will be looking for what happens beyond Thursday’s meeting. If the ECB goes larger on stimulus then we may see a larger move in the pound towards the 2020 highs at 1.2000. Get in touch using the form below to discuss these factors in further detail.