Euro Pound Exchange Rate Firms as ECB Hikes by 50bps
The Euro Pound (EUR/GBP) exchange rate is trading up this afternoon as the European Central Bank (ECB) hiked interest rates by half a percentage point rather than the 25bps forecast by market analysts. Meanwhile, Pound (GBP) support was dampened by weak economic sentiment in the UK.
At the time of writing, the Euro Pound exchange rate is trading at £0.8524, up 0.2% from today’s opening levels.
Euro (EUR) Bolstered by Interest Rate Hike
The Euro (EUR) presented a complex reaction to today’s rate hike decision from the ECB. The central bank hiked interest rates by the 50bps hinted at rather than the 25bps forecast, reinforcing its recent hawkish turnaround.
The single currency climbed steeply against its peers for a short while, responding instinctively to the first rate hike in 11 years. However, the currency almost immediately reversed gains on the relatively dovish speech accompanying today’s release.
ECB President Christine Lagarde admitted that the outlook was clouded for the second half of 2022 and beyond, adding that economic activity is slowing and the war is an ongoing drag.
Inflation is expected to stay ‘undesirably high owing to continued pressures from energy and food prices’, she remarked.
Dovish quotes were subsequently countered by some more positive rhetoric, capping EUR losses. Lagarde informed markets that ‘energy costs should stabilise and bottlenecks ease.’
Chris Beauchamp, chief market analyst at the trading platform IG Group, said of the hike and subsequent speech:
‘The ECB has put new life into the euro… its strong words on its new crisis-fighting mechanism are designed to add to the sense that the central bank is serious about confronting the twin challenges that it faces.’
Pound (GBP) Weakens on Downbeat Outlook, Political Tension
The Pound slumped against the majority of its peers throughout the day as greater-than-expected government borrowing initially pressured the currency, followed by risk-off sentiment and cost-of-living concerns.
This morning, the UK’s public finance figures revealed that the government’s deficit expanded by £23m in June – the highest level in 14 months and almost twice the amount recorded in May.
This presents a predicament for the chancellor of the exchequer, Nadhim Zahawi, who must decide whether it’s worth cutting tax to ease business cost pressures and encourage growth, despite the fact this will most likely exacerbate inflation and the cost-of-living crisis.
Danni Hewson, a financial analyst at AJ Bell, explains:
‘At the moment inflation is playing a dual role because it’s boosting the government’s tax take… but it also means the government is having to pay more and the bill for things like wages is going up.
[If the government] spends too much, debt becomes insurmountable – spend too little [however] and the economy will simply grind to a halt.’
Later in the day, cost-of-living concerns once again subdued GBP as child poverty campaigners argued that the government are ‘abandoning’ struggling families as it announced a support package including free theatre tickets and supermarket discounts.
Alison Garnham, the chief executive of Child Poverty Action Group, commented:
‘A decent living standard for children should never be dependent on retail discounts.’
Euro Pound Exchange Rate Forecast: PMIs, UK Politics to Influence Trading?
Looking ahead, both the Euro and the Pound are likely to suffer tomorrow if manufacturing and services PMIs report reduced activity in July, as expected.
Moreover, UK retail sales look to have fallen once more in June, potentially extending GBP downside.
Elsewhere, the UK’s political scene could also affect EUR/GBP. The number of candidates competing for the UK premiership has narrowed to two, inciting Sterling volatility as the next prime minister comes closer to being announced.
