Pound to Euro Exchange Rate Hits One-Month-Highs as BoE Rate Hike Bets Rise
Investors are becoming more confident that the Bank of England (BoE) will likely prepare to hike UK interest rates in May, and as a result the Pound to Euro (GBP/EUR) exchange rate has seen strong demand this week.
GBP/EUR opened on Monday at the level of 1.1341 and has climbed for most of the week so far. On Wednesday, GBP/EUR touched on a high of 1.1461 before slipping slightly. This was the pair’s best level since January.
The primary reason for Sterling gains has been rising confidence that the Brexit process will unfold smoothly, as well as how this Brexit news bolstered hopes for a more hawkish tone from the Bank of England.
The BoE had noted over the past year that Brexit uncertainty was a major cloud over its monetary policy outlook.
As a result, the recent agreements over major Brexit issues including the terms of a post-Brexit transition period boosted both Brexit hopes and BoE interest rate hike bets.
Pound (GBP) Exchange Rates Appealing as UK Wages Beat Forecasts
Sterling became even more appealing on Wednesday as the latest UK job market results beat expectations, improving Britain’s economic outlook and giving a further boost to Bank of England (BoE) interest rate hike bets.
According to the report, Britain’s key unemployment rate unexpectedly improved from 4.4% to 4.3% in January, the print’s best level in 42 years. The employment rate hit its joint highest level on record, at 75.3%.
However, even more notable was Britain’s January wage growth results, which beat expectations and indicated that the UK pay squeeze was finally coming to an end.
The wages excluding bonuses figure rose from 2.5% to 2.6% as forecast, but the print including bonuses rose past the expected 2.6% to 2.8%. This was partially because the previous figure was revised higher from 2.5% to 2.7%.
Investors became further optimistic about Britain’s job market outlook as the report also indicated that ‘economically inactive’ citizens were more actively looking for work. According to Dr Heather Rolfe from NIESR;
These figures indicate that, in the face of recruitment difficulties, including as a result of a large fall in net migration of EU citizens, employers are hiring people who have not been actively seeking work.
Euro (EUR) Struggles to Hold Ground as Economic Sentiment Slips
Concerns that ramped up protectionist rhetoric from the US could spark a global ‘trade war’ have finally impacted Euro trade this week, as trade war concerns were among the main reasons for a surprising drop in German economic sentiment in March.
According to ZEW’s latest German economic sentiment index survey, confidence unexpectedly plunged from 17.8 to 5.1 in March. The Eurozone sentiment figure was concerning too, slumping from 29.3 to 13.4 and well below the forecast 28.1.
The fall in confidence indicated that investors were indeed anxious about how US trade policies may impact the Eurozone going forward.
On the other hand though, Eurozone consumer confidence appeared largely unaffected. The March consumer confidence projection remained at 0.1 as expected.
Pound to Euro (GBP/EUR) Forecast: Bank of England (BoE) Policy Decision in Focus
The Pound to Euro (GBP/EUR) exchange rate is on track to sustain another week of gains, and unless there is disappointing UK news towards the end of the week this is likely.
For GBP/EUR investors, the biggest event before the weekend will be Thursday’s Bank of England (BoE) policy decision. The bank is expected to leave monetary policy frozen, but its tone on the possibility of a UK rate hike in May will be the main news.
Due to stronger UK wage data and the agreement of the terms of a post-Brexit transition period, the bank is perceived as being much more likely to hike UK interest rates in May.
If the bank indicates that a May hike is on the table, GBP/EUR is likely to remain strong until the end of the week. However, if the bank expresses caution about slowing UK inflation the Pound could shed much of its recent gains.
Thursday could be a notable session for Euro trade too, as Markit will publish its March PMI projections for the Eurozone.
On top of this, any comments from European Central Bank (ECB) officials, as well as potential Brexit developments at the upcoming EU summit, could also inspire Pound to Euro (GBP/EUR) exchange rate movement.