The Pound Euro exchange rate dived at the end of this week after the Bank of England (BoE) surprised markets by keeping interest rates unchanged at 0.1%.
Pound plunges following BoE decision
Ahead of the BoE interest rate decision on Thursday, the Pound lacked direction as uncertainty increased as to whether the monetary policy committee (MPC) would vote to raise interest rates.
GBP exchange rates received a boost in midweek trade after the finalised UK services PMI was upwardly revised to indicate the strongest pace of growth in the sector since July.
However, the BoE triggered an aggressive selloff in the Pound after the Bank’s MPC members voted 7-2 to leave interest rates unchanged.
The decision surprised markets as they had increasingly expected a rate hike due to rising inflationary pressure and comments from BoE policymakers that appeared to signal a rate rise.
Downwardly revised growth forecasts to 7% this year, and 5% for 2022, down from 6%, also fuelled Sterling’s losses.
The BoE lifted its inflation expectations, seeing a peak of 5% by April next year but falling back in the second half of 2022.
In the wake of the announcement, GBP/EUR plummeted over 1% and continued to fall on Friday.
Meanwhile, the Euro benefitted from its negative correlation with the US Dollar through the first part of the week, as USD slipped in the lead up to the Federal Reserve interest rate decision announcement.
Following the BoE and Fed rate decisions, the Euro extended its gains against more risk-sensitive currencies.
EUR firmed despite German retail sales and industrial production missing forecast, and the Eurozone manufacturing and services PMIs for October dipping.
Will the Pound extend its losses?
The Pound may continue suffering from the fallout from the BoE interest rate decision into next week.
As markets were surprised by the central bank’s decision, the confusion created from policymaker’s comments prior to the announcement threatens to undermine the BoE’s credibility, potentially stoking additional volatility in GBP.
UK GDP data released later in the week may also dent the Pound, with third quarter growth forecast to slow to 1.4%, down from 5.5% in the second quarter.
At the same time, the Euro could find support from the policy stance gap narrowing between the European Central Bank (ECB) and BoE, with both continuing loose monetary policy, for now at least.
The Euro could also experience some volatility next week stemming from German data releases.
ZEW economic sentiment is forecast to decline again in November to its lowest levels since March 2020, and exports are expected to have fallen -1.2% in September.