The GBP EUR exchange rate was slammed lower after the Bank of England failed to raise rates at the November meeting. The ECB President was also dovish on rates, but the pound sterling could see profit-taking as traders wind back aggressive bets on the BoE’s tightening path. The week ahead sees Germany dominating the economic data, while the week closes with a 3-month GDP update for the UK.
The GBP to EUR rate was heading for the weekend below the 1.1700 level after surrendering recent highs for the year.
UK GDP ahead but the BoE has already downgraded their outlook
The pound sterling versus the euro saw a sharp sell-off on Thursday after the Bank of England surprised markets by failing to hike rates.
Recent comments from policymakers had led traders to believe that a rate hike was imminent. The BoE also stated that they had revised their inflation forecast higher to 5% so that added to the surprise that there was no move now. The OBR had warned of steep inflationary pressure if the bank failed to take action.
“Inflation is projected to fall back materially from the second half of next year,” the BoE said. But it warned that energy prices at their current record highs, would have an important bearing on this projection.
“The path for wholesale energy prices was nevertheless very uncertain, and could change substantially over short periods of time,” the bank said.
A rate increase could be in store for December, according to ING. The BoE said that if labor market data remains in line with expectations, “it would be necessary over coming months to increase the Bank Rate”.
ING said: “Given that it looks like the BoE will probably go ahead and hike in December and that its ‘rate protest’ against market pricing of the BoE policy cycle was relatively modest, we doubt GBP has to fall too much further.”
The key economic release this week for the UK is a GDP update on Thursday, but the BoE also revised GDP lower by 1% and a surprise would be more expected than previously.
German inflation to dominate the week ahead
The latest German inflation number will be the key release on Wednesday and that could pressure recent comments from the ECB, insisting that inflation is ‘transitory’ and rates were ‘very unlikely’ to rise next year.
Lagarde is starting to raise the ire of the German media after a personal attack on the ECB President over recent bank policy decisions.
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.
Europe’s most circulated newspaper gave the finance chief the title of “Luxury Lagarde” in reference to her salary and designer clothes. “Luxury-loving Lagarde makes savers and pensioners poorer,” was the Bild claim.
“Lagarde likes to wear luxury fashion including Chanel, earns almost €40,000 a month — but she doesn’t seem to care about the worries of normal people,” Bild added.
The issue is important for the GBP v EUR because an escalation in tensions between a high inflation Germany and the ECB would weigh heavily on the euro and the ECB’s plans.