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Pound Euro (GBP EUR) Steadies before BoE Rate Decision

Pound Euro exchange rate forecast
  • Pound Euro Hits 1.1125 – Euro Pound Hits 0.9006
  • BoE Rate Decision Imminent – What can We Expect for GBP EUR?

The Pound Euro exchange rate has steadied today as markets await the imminent and highly significant Bank of England (BoE) rate decision.

With an otherwise sparse data calendar for both the Eurozone, all attention has shifted onto the decision – but what can we expect?

The movements of this pairing will be determined predominantly by three variables at the event. The first and most obvious being the overall result of the rate decision, the second being the composition of votes, and the third being the overall sentiment assessed in the accompanying statement.

UK Inflation Could Prompt a Shift Towards Stimulus Removal, Propelling Pound Euro

It is widely expected that the BoE will leave interest rates stable at this meeting, though investors have increasingly begun to expect that the bank could be inching closer to a rate hike.

One of the primary reasons for this is this week’s surprising UK inflation release, which smashed expectations of a 2.8% rise by hitting 2.9% (up from the previous period’s 2.6%). This figure not only remains above the bank’s target, it also gives reason to believe that inflation could be accelerating at an increasing rate.

Indeed, when paired with comments in the August minutes, the possibility for some stimulus removal (if not now, then in the near-term) seems all the more likely. The minutes stated:

‘The withdrawal of part of the stimulus that the Committee had injected in August last year would help to moderate the inflation overshoot while leaving monetary policy very supportive’.

Vote Composition and How it Can Influence GBP EUR

Beyond this, the number of hawkish votes alone could influence Pound Euro movements. In the August meeting the monetary policy committee (MPC) voted 6-2 to leave rates unchanged, and even a small shift towards hawkish favour will be deemed by investors as a sign that the MPC is gearing up for a rate hike.

This is made all the more likely when one considers that various other members have expressed hawkish sentiment, especially with BoE Chief Economist Andy Haldane having previously suggested that monetary policy tightening could be necessary.

Overall BoE Sentiment Liable to Effect GBP EUR

The final variable is, of course, what is contained within the Bank’s accompanying statement and indeed the sentiment that is interpreted from it.

The Bank will likely address the risks of leaving inflation accelerating without changing monetary policy, though they could simply look past it, regarding it as a temporary rise. They could also cite ongoing economic and political uncertainty as reasons not to raise interest rates, painting a dovish picture overall.

If this occurs then demand for GBP EUR will likely drop, depending on the composition of votes in favour of a rate hike.

Ultimately the outlook remains dovish, but with hawkish sentiment ever on the rise (especially with markets appearing to become increasingly sanguine towards Brexit related news), GBP EUR could find itself clawing back some of its recent losses.