The GBP EUR exchange rate tumbled from the new yearly highs set this week at 1.1900 and all eyes will now be on Thursday’s Bank of England interest rate decision. Traders and analysts are expecting a potential rate hike at the meeting to deal with the inflationary surge. The ECB took a more dovish tone by saying that they believed inflation was transitory.
The GBP to EUR rate was heading for the weekend around the 1.1800 level which has governed price action all year.
European central bank stays dovish on rates
The ECB President Christine Lagarde attempted to cool market expectations of a rate hike for 2022. I said that the bank may get one more chance to do that in the face of rising inflation and Lagarde hinted that market players might be getting ahead of themselves with their predictions.
But her comments came on the same day that German inflation surged to a 28-yr high on the recent supply chain and energy price issues.
The central bank decided to keep rates and monetary policy unchanged despite the inflationary pressures. Some market analysts believe the ECB is underestimating inflationary pressures and will have to announce a rate hike before the start of 2023. Money markets are pricing in the probability of a 20-basis point hike for December 2022.
But Lagarde commented:
“Our analysis certainly does not support that the conditions of our forward guidance are satisfied at the time of lift-off as expected by markets, nor anytime soon thereafter”.
“We really looked and very deeply tested our analysis of the drivers of inflation, and we are confident that our anticipation and our analysis is actually correct.”
But she later said it wasn’t for her to say whether markets were wrong. The ECB foresees inflation at 2.2% in 2021, 1.7% in 2022 and 1.5% in 2023.
Unemployment in Germany was also lower than expected on Thursday and that saw further strength for the euro going ahead. Despite this, the German economy has seen recent downgrades from the Bundesbank and OECD for 2021 growth.
Will the Bank of England disappoint bullish rate bets?
The pound sterling versus the euro has bene roaring higher in recent sessions as markets repriced their expectations for a BoE rate hike. Some are expecting a move at the November meeting; however, the bank may use the recent bond market action as a means to hold off this time around.
There is no big-ticket economic data ahead in the week and the Bank of England’s policymakers will have the floor later in the week to determine the trajectory for the British pound.
The GBP v EUR looked on course for the 2020 highs at 1.2000 but the late-week price dump could mean a high is in place. That would also signal the potential for the BoE to disappoint on the size, or pace of rate hikes.
The Rishi Sunak budget also failed to deliver with markets worried about the big spending plans of $150 billion. Critics said the budget failed to tackle the two big risks of inflation and staff shortages.
Pound Sterling Forecast – Powered by Lumon