May Rate Hike Prospects – What can we Expect for the Euro to Pound (EUR/GBP) Exchange Rate?
Markets continue to price in the possibility of a May rate hike from the Bank of England (BoE), with last week’s March rate decision only adding fuel to the fire. But what are the odds and what could it mean for the Euro to Pound (EUR/GBP) exchange rate?
Officials kept the key rate at 0.5% at the March meeting, but two key members of the Monetary Policy Committee (MPC) broke ranks to vote for an immediate rate rise; Ian McCafferty and Michael Saunders.
According to the minutes, other members of the committee were also concerned that not raising interest rates immediately would mean that they would have to be raised faster, and higher down the line in order to prevent the UK economy from overheating.
Indeed, markets are now pricing in a 90% chance that the next decision will be to increase borrowing costs – an outlook that the BoE made no effort to question.
Dan Hanson and Jamie Murray from Bloomberg Economics echoed this sentiment, stating:
‘Sometimes silence is golden. We see the lack of any pushback against market expectations as a tacit endorsement of a May hike. We expect the MPC to deliver at its next meeting’.
If this does occur then the EUR/GBP exchange rate could come under fresh pressure, particularly with the European Central Bank (ECB) regarded as distinctly dovish in comparison.
EU Business Confidence Falls – Euro (EUR) Exchange Rate Outlook Limited
Another notable contributor to the exchange rate outlook for EUR/GBP has been Tuesday’s Eurozone business confidence and economic sentiment readings, with both proving rather poor.
According to the European Commission’s index, business confidence in the bloc fell to a score of 1.34 in March, missing the previous period’s 1.48 print and the forecast of 1.42.
Moreover, the economic sentiment index fell from 114.2 to 112.6, down from the market expectation of 113.2.
These results are surprising, as markets had expected the formation of a government in Germany and the passing of the Italian election to rise back in-line with positive sentiment surrounding global growth.
However, it would appear that the global spectre of a potential ‘trade war’ has spooked investor confidence, with long-term uncertainty regarding how the EU will function without the UK also a concern.
Tim Focas, Financial Services Director spoke directly on this issue:
‘It is not unreasonable to think that this fall in confidence across the Eurozone could be linked to the long-term uncertainty about how the EU will be able to function without the UK’s vast fiscal contribution. With so much talk about how Britain will plug the funding gaps post-Brexit, it is easy to forget the challenges just around the corner for the EU’.
Euro Pound (EUR/GBP) Exchange Rate Outlook: UK GDP Looming
This week is a rather quiet one for both the bloc and the United Kingdom, but Thursday’s final UK GDP estimate for Q4 2017 could prove pertinent.
Markets are currently expecting the year-on-year reading to contract from 1.8% to 1.4%, and the quarterly reading to slip from 0.5% to 0.4%.
If a drastic fall does indeed occur then it would bode poorly for the state of the UK economy, but given the current accelerated UK wage growth and consumer price inflation readings, it is unlikely that it will push the BoE away from a rate hike in May.
Comments are closed.