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Pound (GBP) Rebounds against Euro Following Hawkish Mark Carney Speech

Pound Euro exchange rate forecast

We’ve seen a lot of volatility in EUR/GBP and GBP/EUR exchange rates over the last 24 hours.

The Euro gained a great deal of momentum against the Pound following yesterday’s speech by European Central Bank (ECB) President Mario Draghi and a spate of dovish statements from the Bank of England (BoE). This all changed this afternoon however when quite unexpectedly BoE Governor Mark Carney called for tighter monetary policy.

Carney stated:

‘Some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional.’

Sterling immediately shot up against the majors in response.

GBP Exchange Rates Firmer as British Banks told to hold onto £11 Billion in Capital Reserves

Before this afternoon’s upsurge, Pound Sterling (GBP) exchange rates had predominantly been subdued. Yesterday Carney announced that British banks would have to hold onto an extra £11 billion in capital reserves to safeguard in the event of a future economic slump.

Some traders deemed this announcement as a sign of confidence in the UK economy, which gave Sterling a short lived boost. Other traders were slightly more apprehensive about this news, however, claiming that raising capital requirements could, in turn, raise loan prices, eventually quelling the heat of the credit market and ultimately diminishing the need for a near-term rate hike.

The UK received some positive house price data this morning from Nationwide, who reported year-on-year house price growth of 3.1% for May, significantly up from the previous figure of 2.1%. Healthy employment levels and low mortgage rates are responsible for the positive uptick, but this news ultimately failed to shift Sterling.

Euro (EUR) Stumbles as Officials Claim Investors Misinterpret Mario Draghi Comments

Central bank comments were not as supportive for Euro (EUR) exchange rates however.

European Central Bank (ECB) President Mario Draghi gave a speech on Tuesday which contained a very small shift in semantics. Draghi previously claimed that the need for stimulus was ‘very substantial’, in yesterday’s speech, however, he claimed the need was of a ‘considerable degree’. Investors interpreted this shift as slightly hawkish and bought into Euro in response, sending the single currency soaring against the majors.

However, it was soon reported that Draghi’s speech was meant to signal tolerance for a period of weaker inflation, not signal some kind of imminent policy tightening. At today’s policy panel officials labelled investor reactions as hypersensitive, with the Euro to Pound (EUR) exchange rate tumbling as a result.

Queen’s Speech Vote Looms, What Next for EUR/GBP?

Tomorrow at the House of Commons the Queen’s Speech bill will be voted upon – a bill that outlines the agenda for the coming year and new legislation regarding immigration, Brexit and counter-terrorism. Jeremy Corbyn has asserted that he will vote down the Queen’s Speech bill in an attempt to expel May and her DUP support, but the primary worry is that various Tory MP’s could take a similar stance.

Critics assert that losing this vote would be paramount to losing a vote of no confidence, an event that may very well result in a shift in Tory leadership.

The resulting political uncertainty that would follow if the bill failed to pass could severely hurt the Pound and send the Euro Pound (EUR/GBP) exchange rate soaring.

Current EUR GBP Interbank Exchange Rates

At the time of writing, the Euro Pound (EUR GBP) exchange rate is trading at 0.8780. Conversely the Pound Euro (GBP EUR) exchange rate is trading at 1.1391.