GBP EUR Monthly Outlook: What to Expect for the Month of November

GBP AUD Sinks After Bank of England Joins Dovish Path

The GBP EUR exchange rate could still be heading for the 2020 highs above 1.2000 despite another bump in the road. The pound sterling versus the euro pair has surged from 1.1627 at the start of October to close around 1.1840. The key driver of these gains has been the hawkish comments from the Bank of England and the November 4th interest rate meeting will be crucial.

Bank of England rate meeting key to the November outlook

The Bank of England meets in the first week of November and that meeting will be key for the pound. Analysts have started pricing in a rate hike for November or December and the bank will have to back up those bets with action or risk a sell-off in sterling.

The BoE has previously predicted that the CPI measure of inflation will climb above 4% by the end of the year. However, the bank’s new Chief Economist said last week: “I would not be shocked – let’s put it that way – if we see an inflation print close to or above 5% in the months ahead.”

Analysts at JP Morgan and Goldman Sachs see the bank moving in November, with the former expecting rates to rise 0.25% in November, and then hitting 0.75% by August. Goldman are more hawkish, seeing three rate hikes to 0.75% by May, before a move to 1% by the end of next year.

Elsewhere, there are already signs of the housing market cooling off as British banks and building societies granted the fewest mortgages in more than a year last month.

Consumer lending also slowed down more than expected, which is likely to strengthen some analysts’ concerns that Britain’s rapid recovery from lockdowns is levelling off, just as the BoE looks to raise interest rates.

“The stamp duty holiday has been highly distortionary, causing transactions to be brought forwards and being a major factor behind the frothiness in prices over the past year,” said Martin Beck, senior economic advisor to the EY ITEM Club.

Lagarde and the ECB try one more attempt at ‘transitory’ signal

The European Central Bank had their own interest rate meeting last week and they declined to make any changes or signal that they will do so soon.

ECB Chief Christine Lagarde even tried to soothe markets with the ‘transitory’ inflation tag. Market analysts believe the ECB is underestimating inflationary pressures and will have to announce a rate hike before the start of 2023.

But Lagarde said:

“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.”

The ECB foresees inflation at 2.2% in 2021, 1.7% in 2022 and 1.5% in 2023.

But Lagarde’s comments came on the same day that Germany saw its highest prices since 1993. The pound sterling versus the euro will largely move on this dynamic, where the ECB want to play dovish and the BoE will show how hawkish they plan to be.

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