The GBP to EUR exchange rate was slightly higher on the week after traders saw a mixed outlook for interest rates. Recent comments from the Bank of England and investment bank analysts saw investors pull forward their rate rise expectations to November or December this year, however Wednesday’s inflation expectations were slightly cooler. There are also fears of restrictions being reintroduced in the UK over rising cases.
The GBP EUR was trading at the yearly highs above 1.1800 ahead of the weekend.
Markets pricing in a December rate hike for the UK economy
Comments ahead of Monday by BoE policymaker Saunders and Governor Bailey left traders in no doubt that a rate hike was imminent.
Saunders said inflation, “could become more persistent unless monetary policy responds.”
“I think it is appropriate that the markets have moved to pricing a significantly earlier path of tightening than they did previously,” he added.
“From this perspective, a pace of purchases similar to the level prevailing at the beginning of the year would be appropriate.”
Governor Bailey said: “We have got to, in a sense, prevent the thing becoming permanently embedded because that would obviously be very damaging”.
Employment data for the week saw vacancies at a record in the UK and this will help to cushion the end of the furlough. GDP was also shown to have grown 0.4% in August, which was lower than expectations for a rise of 0.5%.
However, Silvana Tenreyro, considered to be one the BOE’s more dovish voters, warned against a “self-defeating” hike to contain temporary inflation pressures on Thursday.
CME group have priced a 72.7% chance of a December rate hike, according to their futures trading models.
Economic institutes cut German economic outlook
The euro was also hit by the latest German economic institute forecasts for the bloc’s largest economy.
Germany’s leading economic institutes slashed their growth forecasts for this year, saying output is being stifled by global supply chain issues and lingering restrictions.
Germany’ growth forecast for the year was cut to 2.4% from the 3.7% they had previously forecast. However, the five institutes also raised their 2022 forecast to 4.8% from 3.9%, predicting that normal capacity would resume next year.
“The challenges of climate change and the foreseeable lower economic growth due to a shrinking labour force will reduce consumption opportunities,” said IWH Vice President Oliver Holtemoeller.
The five institutes also expect German inflation to be 2.5% in 2022 and 1.7% in 2023.
“We assume that monetary policy will be able to achieve its price stability goal in the medium term. That would be an average inflation rate for consumer prices of 2% per year,” said Holtemoeller.
ZEW economist surveys for the European and German economy were weak at the beginning of the week and German inflation rose from 3.9% to 4.1%. The GBP v EUR now faces a key test at the yearly highs. Getting above that level would see the next resistance at 1.2050, which was the pre-pandemic highs for sterling.
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