The Pound Euro (GBP/EUR) exchange rate rallied from a two-week low this week, after a hawkish Bank of England (BoE) triggered speculation the bank could raise interest rates early next year.
Pound rallies as BoE expected to hike interest rates in early 2022
The Pound trended lower through the first half of this week’s session, amidst fears the UK’s escalating energy price crisis could further undermine the resilience of the country’s economic recovery.
However, the second half of the week then saw the GBP/EUR exchange rate mount a convincing recovery, following the conclusion of the BoE’s latest policy meeting.
Whilst the BoE opted to leave interest rates at a record low this month as expected, GBP investors seized on the bank’s surprisingly hawkish forward guidance.
In light of considerable inflationary pressure in the UK, the BoE suggested that the cases for moderately tightening its monetary policy had ‘strengthened’, remarks which saw markets begin to price in a rate hike from the bank as early as March 2022.
At the same time, whilst it was able to strengthen against a weakened Pound, the Euro’s performance against it other peers proved mixed through the first half of the week,
The Euro then faced additional pressure in the latter half of the session after the latest Eurozone PMI figures printed below expectations.
Eurozone inflation in focus
Looking ahead the publication of the Eurozone’s consumer price index may act as a key catalyst in the GBP/EUR exchange rate next week.
September’s preliminary CPI figures are expected to show that inflationary pressure in the Eurozone continues to build.
However, the question for EUR investors will be whether or not this will be enough to prompt the European Central Bank (ECB) to rethink its current dovish stance on monetary policy, with any upside in the euro likely to remain capped so long as the ECB is unwilling to consider tightening its monetary policy.
Also likely infusing some volatility into the Euro will be German uncertainty, as the election will be succeeded by political wrangling over a new coalition government.
Meanwhile, the Pound’s post-BoE gains could be tested next week, amidst persistent concerns over the UK’s economy.
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