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Pound Euro Exchange Rate Trends Near Highs Despite Bank of England (BoE) Uncertainty

  • Pound Euro Exchange Rate Nears Key 1.13 Level – Pair ends week near highs
  • European Central Bank Keeps Pressure on Euro – QE extended into 2018
  • GBP Forecast: Bank of England in Focus – Could bank hike UK interest rates this week?
  • EUR Forecast: Key Growth and Employment Ahead – Could influence Eurozone outlook

The Pound Euro exchange rate advanced in recent sessions, due largely to the cautious tone of the European Central Bank’s (ECB) October policy decision. The pair could shed its gains however, as markets remain unsure about the upcoming Bank of England (BoE) meeting.

GBP EUR began last week trending at the level of 1.1188. After a brief dip to a low of 1.1147, the pair surged and on Friday afternoon was trending near a three-week-high of 1.1327.

Pound (GBP) Strength Limited by Bank of England (BoE) Uncertainty

The Pound could have been even higher against the Euro last week if the British currency hadn’t been weighed down by political and economic uncertainties.

Brexit jitters have persisted, with markets unsure if negotiations will be able to proceed onto UK-EU trade talks any time soon. This has reportedly affected business confidence, as a drop in car production was blamed on Brexit uncertainties.

Britain’s economy is not resilient in all areas either, despite a higher-than-expected UK Gross Domestic Product (GDP) projection for Q3.

A fresh report from the Confederation of British Industry (CBI) indicated that UK retail activity had plunged in September and October. The print saw its worst drop since the global recession, in 2009.

It was due to Brexit uncertainties and mixed economic data that some analysts and investors believe the Bank of England (BoE) is unlikely to hike UK interest rates during its upcoming November policy decision.

The BoE will hold its November meeting next week, with its decision due to be announced on Thursday. In recent months, speculation has surged that the bank is preparing to hike UK interest rates soon.

Some analysts believed the latest UK growth stats supported the idea of a rate hike, but a lack of clear forward guidance as well as mixed data has weighed on rate hike bets, limiting Pound strength.

Despite this uncertainty, Sterling benefitted from broad weakness in the Euro.

Euro (EUR) Investors Disappointed with European Central Bank News

The Euro outlook dropped on Thursday and remained weak on Friday, as the latest European Central Bank (ECB) policy decision disappointed hawkish investors.

Many Euro traders were hoping that the ECB would announce plans to fully unwind its quantitative easing (QE) scheme over the next year and possibly even hint that other monetary policy could be tightened in the foreseeable future too.

However, reports that the ECB were planning a dovish statement to keep the Euro from becoming too strong appeared to be on the mark.

The ECB confirmed that its bond purchasing QE program would be cut from €60b per month to €30b per month, and that the deadline would be extended until September 2018.

ECB President Mario Draghi made sure it was understood that this deadline was flexible and could be extended even further if necessary.

These comments indicated to investors that it would be quite some time before the ECB began to consider hiking Eurozone interest rates from their lowest levels.

According to Valentin Marinov, head of G10 FX research at Credit Agricole in London;

‘Draghi’s discussion of the ECB’s reinvestment strategy has hammered home the message that the “flow component” of the recalibrated QE (asset purchase) program will remain sizeable,

Morever, the President’s comments on safeguarding QE’s longevity caught some market participants by surprise and this could leave the euro vulnerable in the short term.’

Overall, the ECB’s tone tempered market bullishness for the Euro, and left the shared currency tumbling from its recent highs towards the end of the week.

Pound Euro Exchange Rate Forecast: Bank of England (BoE) in Focus

Thursday’s Bank of England (BoE) policy decision is easily the biggest event for Pound Euro exchange rate traders in the coming week, unless there are any major surprising political developments.

Markets are still split on whether or not the BoE will hike UK interest rates on Thursday.

If the bank does hike interest rates, it’s likely the Pound Euro exchange rate will surge, as many investors would be surprised at the rate hike. Sterling would easily capitalise against a weak Euro.

However, if the BoE opts to leave interest rates frozen and takes a vague stance on when the potential interest rate hike could actually happen, the Pound will plunge from its recent highs.

Upcoming data could influence GBP EUR exchange rate movement slightly, but movement is likely to be limited and volatile before the bank decision on Thursday.

Markit will publish its final October PMIs for Britain and the Eurozone from Wednesday through Friday.

Meanwhile, key growth and unemployment stats for many Eurozone members will be published throughout the week. Eurozone growth data could boost the Euro if it impresses and limit further advances for the Pound Euro exchange rate.