The Pound Euro exchange rate struck its worst levels since the start of February this week amid concerns over a divergence in UK-US monetary policy.
GBP/EUR punished by BoE’s apparent dovish bias
The Pound Euro exchange rate got off to a poor start this week. The Euro strengthened at the start of the session after European Central Bank (ECB) policymaker Robert Holzmann called for the bank to raise interest rates by 50bps at each of its next four policy meetings.
The downturn in GBP/EUR was then accelerated on Tuesday after Federal Reserve Chair Jerome Powell stunned markets by hinted the US central bank could begin to raise the pace of its rate hikes again.
This pulled the Pound lower as it stoked concerns over potential policy divergence between the Fed and Bank of England, something which was highlighted by comments from BoE policymaker Swati Dhingra calling for UK interest rates to be kept on hold.
Meanwhile, the Euro began to give ground in the middle of the week on the back of some mixed German data.
The second half of the week then saw the GBP/EUR exchange rate rebound as market risk appetite began to improve.
This recovery was then reinforced by the publication of the UK’s latest GDP figures on Friday. The data reported UK economic growth rebounded at a faster-than-expected pace in January, further easing recession concerns.
Hawkish ECB forward guidance to underpin the Euro?
In the spotlight next week will undoubtedly be the outcome of the ECB’s March policy meeting. The ECB is widely expected to deliver another 50bps interest rate hike this month.
With the increase already priced in by EUR investors any resulting movement in the Euro will be tied to the ECB’s forward guidance.
If the ECB signals it will continue to raise interest rates in the coming months then the single currency is likely to rally.
In the meantime, the UK will publish its latest jobs report on Tuesday. Economists forecast unemployment will have held at 3.7% for the fourth consecutive month in January.
However, the accompanying earnings figures are expected to show wage growth accelerated sharply over the same period.
A jump in wage growth could indicate inflation continues to run hot, bolstering BoE rate hike expectations and potentially lifting the Pound.
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