Euro Pound (EUR/GBP) Exchange Rate Fluctuates on Bullish Lagarde
The Euro Pound (EUR/GBP) exchange rate is trading narrowly as European Central Bank (ECB) President Christine Lagarde delivered hawkish commentary at the ECB Forum on Central Banking.
At time of writing, the EUR/GBP exchange rate is around £0.8595, relatively unchanged from this morning’s opening levels.
Euro (EUR) Buoyed by Rate Hike Expectations
The Euro (EUR) is finding modest strength against many of its peers this morning in the wake of Lagarde’s opening remarks on day two of the conference in Sintra.
Citing that inflation remains extremely high in the Eurozone, Lagarde added that the central bank must keep monetary policy adequately restrictive to tame inflationary pressures. She also added that wage pressures have been amplified its impact on inflation. Lagarde added:
‘Inflation in the euro area is too high and is set to remain so for too long. But the nature of the inflation challenge in the euro area is changing. This persistence is caused by the fact that inflation is working its way through the economy in phases, as different economic agents try to pass the costs on to each other.’
Elsewhere, ECB policymaker Matin Kazaks also appeared hawkish. He commented this morning that he believes the central bank will continue to raise interest rates beyond July. He also warned that there are strong risks of inflation remaining persistently high. Kazaks also added that expectations of rate cuts at the beginning of next year are premature.
Pound (GBP) Undermined by Recession Fears
Meanwhile, the Pound (GBP) is remaining under pressure this morning as growing fears of a looming recession is spooking investors.
Economists at Bloomberg have warned that the UK will enter a long and shallow recession by the end of 2023. With inflation still the highest amongst G7 countries, and the Bank of England’s relentless hiking cycle, a recession is expected. Bloomberg economists Dan Hanson and Ana Andrade said of the situation:
‘The risk is the data continue to prove unresponsive to the BOE’s actions and interest rates rise further than our baseline. As borrowing costs move above 5%, we think the risk of a financial stability shock increases exponentially.’
As headline CPI remains stubbornly high at 8.7%, with core inflation accelerating to the highest level in 31 years, the economic outlook for the UK is darkening. Warnings of a year-long recession could also wipe out 1% of the UK’s economic output.
Euro Pound Exchange Rate Forecast: Hawkish ECB to Bolster the Euro?
Looking ahead, the Euro Pound exchange rate could see further fluctuations with a series of further speeches from ECB policymakers. If the likes ECB board member of Isabel Schnabel and Vice President Luis de Guindos continue a hawkish rhetoric, the Euro could find further strength.
Meanwhile, speeches from BoE policymakers may have the adverse effect on the Pound. Amidst fears of a recession, the central bank may adopt a more cautious stance, which could disappoint GBP investors. BoE Governor Andrew Bailey and Chief Economist Huw Pill are scheduled to speak at the ECB forum, and if a dovish tone is struck, Sterling could stumble.
