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Euro Pound Exchange Rate Slumps Sharply on BoE Policy Split

There was a sense of relief for the Euro once the results of the Dutch election became clear, with far-right candidate Geert Wilders failing to claim victory.

This suggested that the swing towards populist, Eurosceptic parties is not as much of an unstoppable force as markets had begun to fear.

As a result the Euro Pound exchange rate regained some ground on Thursday morning, even though the momentum of the relief rally proved to be somewhat limited.

Following the Federal Reserve’s much-anticipated interest rate hike the single currency has been somewhat muted.

While the Fed was less hawkish in tone than expected the meeting nevertheless highlighted the likelihood that the European Central Bank (ECB) will remain on hold for longer.

With the Eurozone core consumer price index confirmed to have risen at a steady 0.9% on the year in February there seems little particular motivation for the ECB to return to a tightening bias in the foreseeable future.

Political concerns for the currency union are still far from over, with focus turning back towards the French presidential election and the chances of National Front leader Marine Le Pen.

Even though centrist candidate Emmanuel Macron continues to poll strongly, maintaining a good lead over his rivals, the possibility of an upset remains.

The rise in support for Eurosceptic parties is likely to keep markets wary, creating the potential for further EUR exchange rate volatility.

However, the EUR GBP exchange rate slumped sharply in the wake of the Bank of England (BoE) policy decision.

While policymakers voted to leave interest rates on hold the Monetary Policy Committee (MPC) proved unexpectedly divided in opinion.

Noted hawk Kristin Forbes voted for a 25bpt interest rate hike, surprising investors and pushing the Pound higher across the board.

This surge in Sterling support seems unlikely to last, though, as Forbes is due to leave the MPC in June and the meeting minutes were still rather dovish in tone.

Policymakers noted that:

‘The Committee must balance the trade-off between the speed with which it intends to return inflation to the target and the support that monetary policy provides to jobs and activity. At its March meeting, the MPC continued to judge that it remained appropriate to seek to return inflation to the target over a somewhat longer period than usual.’

This suggests that the BoE still expects to maintain a neutral policy outlook for longer, limiting hopes that rising inflation could force its hand.

Nevertheless, the EUR GBP exchange rate could still come under pressure if Tuesday’s UK inflation data shows a fresh uptick on the month.

Current EUR GBP Interbank Exchange Rates

At the time of writing, the Euro Pound exchange rate was continuing to trend lower in the region of 0.86.