Pound (GBP) Exchange Rates Push Higher Despite Unanimous BoE Rate Hold
While the Bank of England (BoE) Monetary Policy Committee (MPC) opted to leave interest rates on hold by unanimous decision this failed to prevent a rally for the Pound to Euro (GBP/EUR) exchange rate.
As the quarterly Inflation Report saw an upwards revision in its growth forecasts the mood towards the Pound (GBP) naturally improved, encouraging hopes that the BoE will raise interest rates again in the coming months.
BoE Rate Decision Poised to Trigger Pound Euro (GBP/EUR) Exchange Rate Volatility Today
Ahead of the Bank of England (BoE) rate decision and quarterly Inflation Report the Pound to Euro (GBP/EUR) exchange rate was trapped in a narrow range.
Confidence in the Pound (GBP) remained limited as markets braced for the impact of the decision, with speculation rife over the level of hawkishness that will be on display amongst policymakers.
Even though hopes are still high for the BoE to raise interest rates again in the coming months, though, investors see little chance of a rate hike at this stage.
As analysts at Nomura noted:
‘With only three months having passed since the BoE’s decision to raise rates for the first time since the financial crisis, we do not expect any changes in policy from the MPC at this month’s meeting.
‘However, at some point in the near future, we expect to see a language-change that will ultimately signal a policy move at the May meeting.
‘A significant shift in signalling – like we saw in September last year – seems unlikely at this week’s meeting, but the Governor may leave all options on the table, so as not to rule out a move as soon as May.’
Underwhelming German Trade Data Drags on Euro (EUR) Exchange Rates
Demand for the Euro (EUR), however, eased in the wake of disappointing German trade data, helping to limit the downside bias of the GBP/EUR exchange rate.
While the Eurozone’s powerhouse economy still clocked a surplus of 18.2 billion in December this fell significantly short of forecast, signalling a sharp narrowing on the month.
This move was largely driven by a notable uptick in import volumes, although exports still showed some growth at the end of 2017.
With a sense of uncertainty still overshadowing the breakthrough in German coalition talks there was little compelling incentive to favour the Euro on Thursday, particularly given the resurgence of the US Dollar (USD).
Even so, EUR exchange rates could see further losses if commentary from European Central Bank (ECB) policymakers continues to take a more dovish view on the domestic outlook.
Hawkish BoE Outlook Forecast to Shore up GBP/EUR Exchange Rate
If the BoE opts for a more hawkish message today the GBP/EUR exchange rate could find a rallying point this afternoon.
Anything that improves the odds of a May interest rate hike should drive demand for the Pound higher, even if the BoE remains on hold for the time being.
Focus will also fall on the details of the BoE Inflation Report, which may weigh on GBP exchange rates if its forecasts see any significant downgrades.
With confidence in the economic outlook hampered by the continued state of uncertainty surrounding the subject of Brexit the upside potential of Sterling remains somewhat limited.
Friday’s raft of UK production data and the latest NIESR gross domestic product may also dent the GBP/EUR exchange rate, with forecasts pointing towards a slowdown on the previous month’s figures.