Euro Pound (EUR/GBP) Exchange Rate Strengthens amid Hawkish ECB Bets
The Euro Pound (EUR/GBP) exchange rate is strengthening today, as bets on further tightening propel the common currency.
At the time of writing, EUR/GBP is trading at around £0.8565, rising by just over 0.3% from the morning’s opening rates.
Euro (EUR) Strengthens on Hawkish ECB Bets
The Euro (EUR) is strengthening today, despite a lack of macroeconomic data drivers. EUR investors are likely propping up the single currency as they bet on further rate hikes from the European Central Bank (ECB).
Following last week’s decision to raise interest rates by 25bps, ECB President Christine Lagarde left the door open for an additional rate hike in July.
Expectations have continued to mount since, likely being stoked by more hawkish members of the bank. However, there is an emerging schism amongst policymakers, with more dovish members advocating for an imminent pause.
Economists at Commerzbank commented:
‘It is hardly surprising that the hawks are advocating a rate hike in September reasonably clearly, whereas the doves are trying to dampen expectations. The doves might increasingly make cautious comments at least if the economic data points more or less towards easing price pressure so that the Euro’s upside potential might be limited for now.’
Pound (GBP) Dampened despite Continued Rate Hike Bets
The Pound (GBP) is coming under pressure today, as investors await the imminent UK inflation data and consider the UK’s economic health.
Furthermore, a risk averse market mood is likely exerting downward pressure on Sterling, due to its increasingly risk-sensitive nature.
Interest rate hike bets are likely serving to keep GBP from bottoming out during today’s trade. Markets have been pricing in a terminal rate of around 5.75-6% by February 2024.
However, this would likely tip the UK into a recession if it came to pass. As such, the bets may be a double edged sword for Sterling rates.
Dan Hanson, an Economist at BE, commented:
‘If this tightening cycle has taught us anything, it’s not to underestimate the persistence of inflation. The BOE may judge a significant slump is what’s needed to prevent the inflation psychology in the UK from becoming embedded.’
EUR/GBP Exchange Rate Forecast: UK Inflation in Focus
Looking ahead for the Pound, the core catalyst of movement is likely to be tomorrow’s inflation print. Headline inflation is forecast to cool from 8.7% to 8.4% in May, core inflation is expected to hold at 6.8%.
If this prints as forecast, it may indicate a 25bps hike on Thursday, and open the door for future hikes. With it likely to prompt increased rate hike bets, the Pound will likely rally in tandem.
For the Euro, the focus may be on a bevy of speeches from European Central Bank policymakers. The main driver of movement could come tomorrow, wherein ECB policymaker Isabel Schnabel is scheduled to speak.
As a thoroughly hawkish member of the ECB, she could strengthen EUR if she advocates for further tightening.
