GBP EUR Exchange Rate: The Week Ahead May 8th

GBP EUR Exchange Rate: The Week Ahead May 8th

The GBP EUR exchange rate was hit hard on Thursday last week as the Bank of England (BoE) raised interest rates and offered stark projections into the end of 2023. The UK is set for higher energy bills in October which will tip the country into negative growth for the fourth quarter, according to the BoE. Their forecast for 0.25% growth next year is as good a warning of recession as you can get from optimistic policymakers.

The GBP to EUR was trading near the 1.1700 level into the weekend after the 1.1800 support gave way.

Bank of England up against the wall, but is all good at the ECB?

The financial markets reacted badly to the latest Bank of England interest rate meeting, where the rate hike to 1% came with gloomy forecasts for the year ahead.

The headline for spooked investors was a projection for a rise in inflation to 10% driven by energy bills and commodity prices.

The Bank is now predicting that average annual gas and electricity prices, which soared to £1,971 last month, will jump again in October, to around £2,800. That is set to put a further squeeze on households and their real income, slashed its forecast for gross domestic product growth next year from 1.25% to -0.25%.

It said that unemployment would also start to climb, with the rate rising to 5.5% by the middle of 2025.

Monetary policy is now going into reverse as rising unemployment and recessions have been met with rates being slashed, but the chickens are coming home to roost for the slack monetary decisions over the last decade.

Despite the gloomy outlook for the UK economy, it remains to be seen how long the European Central Bank can play chicken with its member states.

The week ahead may offer some insight with German inflation released on Thursday. That is forecast to show a measly rise of 0.1% to 7.4% but that projection could be tested in the current circumstances.

The Federal Reserve added a 50% rate hike this week, while the Australian Reserve Bank also shocked markets with a larger hike to 0.35%.

The head of the ECB said last week that there is “potential” for raising interest rates in the eurozone this summer.

“The ECB has decided to phase out its multibillion-euro pandemic bond purchases “with a high degree of probability” that it is done by the early part of the third quarter, probably in July,” she said.

“And then it will be time to look at interest rates,” she added.

The ECB are afraid to hike rates because of their huge bond holdings and are trying to be the lone central bank that gets a pass in these extreme conditions. That could come back to bite them further down the line. The last week already saw retail sales pressured in Germany and the Eurozone, while Germany’s long-held export surplus is in danger of lurching to a deficit as Russia exports imploded.

Things are just heating up for financial markets as the new revisions for the UK economy are highlighting.