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Euro to Pound Exchange Rate Extends Gains on Continuing BoE Rate Cut Possibility

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Even though the Bank of England (BoE) remained on hold at its September policy meeting this failed to boost market confidence, allowing the Euro to Pound exchange rate to make further gains.

  • No surprise as Bank of England left interest rates unchanged – Pound trended lower as policymakers maintained dovish outlook
  • Narrowed Eurozone trade surplus failed to dent Euro demand – Stable inflation data offered encouragement
  • European banking shares dented by Deutsche Bank fine – Worries over future of banking sector to hang over Euro confidence
  • Stronger UK housing data forecast to boost GBP – EUR GBP exchange rate could trend lower if signs of Brexit impact remain limited

While investors continue to speculate over the odds of the Federal Reserve raising interest rates in the near future the Euro has remained relatively robust.

Pound (GBP) Failed to Rally as BoE Outlook Remained Dovish

Expectations had not been particularly high ahead of the Bank of England’s (BoE) September policy meeting, allowing the Euro to Pound (EUR GBP) exchange rate to trend higher. While there was some measure of relief rally from investors after policymakers were revealed to have voted unanimously to leave interest rates unchanged this did not last for long. Instead markets reacted unfavourably to the indication that the Monetary Policy Committee (MPC) remains open to lowering rates to a fresh record low. As a result the Pound (GBP) slumped further across the board, despite a positive showing from August’s Retail Sales data.

Demand for the Euro (EUR) was supported by a lack of change in the finalised Eurozone Consumer Price Index report, which confirmed inflation of 0.2% on the year in August. Despite this being a long way from the European Central Bank’s (ECB) target of 2% the modest improvement gave investors no particular reason to sell out of the single currency. This helped to overshadow a more disappointing July trade balance report, which showed that the Eurozone’s trade surplus had unexpectedly narrowed from 29.2 billion to 25.3 billion.

Euro (EUR) Remained Dominant despite European Banking Sector Worries

Ahead of the weekend the EUR GBP exchange rate has been able to maintain its stronger form, even though European banking shares have come under fire. Overnight it was announced that Deutsche Bank is being fined $14 billion by the US Department of Justice; the result of miss-selling prior to the 2008 financial crisis. This hefty fine is likely to weigh heavily on the outlook of the German lender, fuelling concerns over the robustness of the domestic banking sector. Although this development did exert some negative pressure on EUR exchange rates it was not enough to open the way for a Pound rally.

Confidence in Sterling remained weak on Friday morning, with nothing in the way of fresh domestic data to distract investors from the fallout of the BoE meeting. The odds for a November rate cut have strengthened notably in the wake of the meeting minutes, in spite of the fact that the BoE raised its forecasts for post-referendum growth. As Ross Walker, research analyst at RBS, noted:

‘In general, corporate activity indicators will be more important than consumer ones as this is where the MPC expects the Brexit shock to materialise first (any deterioration in consumer demand is more likely to be apparent in 2017 as inflation spikes higher, wage inflation is subject to a more prolonged squeeze and unemployment rises).’

EUR GBP Exchange Rate Forecast: Robust UK House Prices Could Boost Pound Demand

Support for the Pound could come on the back of Monday’s Rightmove House Prices report, which could point towards a continued tightening of the domestic housing market. Should the initial negative impact of the Brexit vote be shown to have dissipated further then the EUR GBP exchange rate is likely to weaken. Nevertheless, the bearishness of Sterling could persist over coming days if markets remain preoccupied with the outlook of the BoE.

Forecasts are for Eurozone Construction Output to have slowed in July, with production expected to have dipped from 0.6% to 0.1% on the year. A weaker result here would not seem to bode overly well for the health of the currency union, undermining the impression that the ECB will continue to hold off on further monetary loosening. Even so, if the odds of an imminent Fed rate hike decline further the EUR GBP exchange rate could hold onto an uptrend.

Current EUR, GBP Exchange Rates

At the time of writing, the Euro to Pound (EUR GBP) exchange rate was trending higher at 0.8507, while the Pound to Euro (GBP EUR) pairing was slumped in the region of 1.1754.