Concerns that the Bank of England (BoE) could suddenly cut UK interest rates today quickly faded after the bank’s policy decision, and the British Pound to Euro (GBP/EUR) exchange rate experienced a rebound in demand. As much of the Pound’s recent weakness was due to speculation of an imminent BoE rate cut, today’s BoE decision was perceived as relieving and the Pound has been able to regain some of its recent losses as a result.
After markets opened this week, GBP/EUR fell from opening levels of 1.1856 and spent over half of the week trending lower. GBP/EUR touched on a weekly low of 1.1784 this morning, but rebounded following the BoE decision.
At the time of writing on Thursday afternoon, GBP/EUR is trending closer to the level of 1.1876 – having recovered the week’s losses due to the Pound rebound.
Now that BoE uncertainty is out of the way for the time being, Euro investors look ahead to tomorrow’s key Eurozone data while Pound investors await tomorrow’s Brexit event.
GBP Exchange Rates Jump as Bank of England (BoE) Shows Confidence in UK Economy
For much of the past few weeks, markets had been split on the tone the Bank of England (BoE) could take in its January policy decision.
Poor UK ecostats and Brexit uncertainty caused concerns that the BoE could cut UK interest rates as soon as this month. Some UK data since beat forecasts, but was not enough to totally offset BoE interest rate cut speculation.
This, as well as fresh Brexit jitters, kept the Pound under pressure in recent sessions. As a result, the Bank of England’s less dovish than feared policy decision today was a positive surprise that led to a jump in Pound demand.
The BoE voted 7-2 to keep rates frozen, the same split as the previous decision. News that no more policymakers had voted for a rate cut also made investors more confident about the bank’s outlook.
While the bank cut growth forecasts and rate hike hints, as well as expressing concern over the coronavirus issue, the Pound still enjoyed strong demand as the bank was overall optimistic that Britain’s economic activity was improving.
According to the bank’s meeting minutes:
‘Since the December meeting, international developments had been positive and the most recent UK data supported the forecast of a near-term recovery in growth.
The Committee would monitor closely the extent to which these early indications of an improved outlook were sustained and followed through to the hard data on domestic activity in coming months.’
Still, the bank did warn that if the UK economic rebound fails to fully materialise, a rate cut is on the table in the coming months.
EUR Exchange Rates Kept Pressured by Rival Strength and Global Uncertainties
Recent Eurozone data has been fairly optimistic, and has been boosting market support for the Euro. That includes today’s Eurozone stats, which beat forecasts in some key prints.
Eurozone economic sentiment and industrial sentiment was slightly stronger than expected in January survey results, and the Eurozone’s latest unemployment rate figure showed an unexpected improvement to 7.4%.
However, the data was not enough to make analysts more optimistic on the Eurozone’s economic outlook, especially as uncertainties around the coronavirus had not yet been factored into survey data.
Bert Colijn, Senior Economist at ING Bank, said:
‘… the bottom in manufacturing is now getting close
‘One has to be cautious in interpreting these numbers though, as uncertainty around the impact of the coronavirus on the global economy is mounting,’
These uncertainties, as well as lasting strength in rival currencies the Pound and US Dollar (USD), are limiting the Euro’s appeal today.
GBP/EUR Exchange Rate Forecast: Could Eurozone Growth Give Euro More Solid Support?
With most of this week’s uncertainties now passed, the Pound to Euro exchange rate may be on track to end the week without losses if upcoming data fails to give the Euro new support.
Friday will see the publication of some of the week’s most influential Eurozone ecostats.
The slew of upcoming figures includes German retail sales, French and Eurozone growth, and French and Eurozone inflation results.
If German retail stats beat forecasts, they could boost hopes of a rebound in German economic activity.
Similarly, if the Eurozone’s Q4 growth projections beat forecasts the Eurozone’s economic outlook could improve overall.
As for the Pound, tomorrow’s UK consumer confidence data is likely to have a limited impact on currency movement.
However, as Brexit is finally taking place tomorrow, the Pound to Euro exchange rate could see a shift in movement if Brexit fears return and hit the Pound again.
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