Update: Euro Pound Sterling (EUR/GBP) Exchange Rate Falls Back on BoE Rate Hike
Confirmation that the Bank of England (BoE) had voted to raise interest rates from 0.50% to 0.75% prompted the Euro to Pound Sterling (EUR/GBP) exchange rate to slump.
Markets were encouraged by the unexpectedly unanimous nature of the decision, with the entirety of the Monetary Policy Committee (MPC) voting in favour of the rate hike.
This suggests that the BoE is less concerned by the underwhelming nature of recent UK inflation and wage growth data, offering Pound Sterling (GBP) a boost across the board.
Euro Pound Sterling (EUR/GBP) Exchange Rate Braces for BoE Interest Rate Decision
As markets brace for the Bank of England’s (BoE) August policy announcement the Euro to Pound Sterling (EUR/GBP) exchange rate remains trapped in a narrow range.
While investors have priced the odds of an imminent interest rate hike at 91% the mood towards Pound Sterling (GBP) remains jittery.
There is still a risk that policymakers will disappoint expectations and leave monetary policy on hold once again, something which could prompt GBP exchange rates to slump sharply.
On the other hand, if the BoE raises interest rates as forecast this could limit the upside potential of the EUR/GBP exchange rate.
As analysts at TD Securities noted:
‘We expect an 8-1 vote in favour of a hike, but such a strong majority in favour should be relatively unimportant for future policy prospects as we think the MPC is comfortable with markets expecting a pause until well into 2019 (we expect the next hike in May-19).
‘What will be more telling will be the Bank’s first ever publication of an estimate of the neutral rate, and how the MPC characterises the speed of convergence toward it.’
If signs point towards the BoE leaving interest rates on hold for the foreseeable future this could offer the EUR/GBP exchange rate a solid boost.
Rising Eurozone Producer Price Index Fails to Boost EUR/GBP Exchange Rate
The Euro to Pound Sterling (EUR/GBP) exchange rate struggled to capitalise on a solid uptick in June’s Eurozone producer price index.
While price pressures within the currency union showed fresh signs of acceleration this was not enough to boost demand for the Euro (EUR).
Following the disappointing nature of recent Eurozone growth data investors are less inclined to favour the single currency.
However, if the finalised raft of Eurozone services PMIs prove positive this could encourage EUR exchange rates to return to a stronger footing on Friday.
Unless markets see signs that the currency union is recovering some of its lost economic momentum in the third quarter, though, the mood towards the Euro is likely to remain bearish.
Euro Pound Sterling (EUR/GBP) Exchange Rate Looks for Support on UK Services PMI
July’s UK services PMI could provoke further volatility for the Euro to Pound Sterling (EUR/GBP) exchange rate ahead of the weekend.
If sector activity appears to be slowing this could weigh heavily on the Pound, given that the service sector accounts for more than three quarters of UK growth.
A weaker showing here would leave GBP exchange rates vulnerable to further losses, underlining the uncertainty that continues to hang over the outlook of the UK economy.
While the headline index is forecast to remain firmly above the neutral baseline of 50, signalling continued growth, any decline may dent demand for the Pound.
An uptick, however, could put renewed pressure on the Euro to Pound Sterling (EUR/GBP) exchange rate ahead of the weekend.