- Bank of England (BoE) holds interest rate but reduces 2016 growth forecasts
- Pound Sterling (GBP) exchange rates strengthen as BoE warns of ‘Brexit’ risks
- Euro (EUR) cools as domestic data disappoints
- GBP/EUR forecast to hold gains
Pound Sterling (GBP) Exchange Rates Advance despite Reduced Growth Forecasts
The Pound Sterling to Euro (GBP/EUR) exchange rate advanced by around 0.5% on Thursday afternoon.
As was expected by the majority of analysts, the Bank of England (BoE) opted to keep the benchmark interest rate unchanged at 0.50%. However, forecasts for 2016 growth were reduced. Policymakers blamed EU referendum uncertainty and the damage it has caused economically to reduced British output.
Despite this, the Pound advanced versus a number of its major peers. The appreciation can be related to major warnings from BoE Governor Mark Carney and the Monetary Policy Committee that a ‘Brexit’ is likely to have a damaging impact on UK growth. Carney argued that a ‘Brexit’ would cause growth to slow but inflation to rise. The BoE stated;
‘The MPC would face a trade-off between stabilising inflation on the one hand and output and employment on the other. The implications for the direction of monetary policy will depend on the relative magnitudes of the demand, supply and exchange rate effects. Whatever the outcome of the referendum and its consequences, the MPC will take whatever action is needed to ensure that inflation expectations remain well anchored and inflation returns to the target over the appropriate horizon.’
The clarity of the Bank’s warnings that a ‘Brexit’ risks significant damage to the economy saw the UK Pound gain markedly. This is because many predict that those sitting on the fence with regards to the EU referendum vote will now be persuaded to vote to remain.
Chancellor George Osborne stated; ‘Today we have a clear and unequivocal warning, not just from the Governor of the Bank of England but also in the collective judgement of the Monetary Policy Committee, that a vote to leave would mean both materially lower growth and notably higher inflation.’
The Pound Sterling to Euro (GBP/EUR) exchange rate is currently trending in the region of 1.2701.
Euro (EUR) Exchange Rates Decline as Eurozone Industrial Production Drops
Although easing ‘Brexit’ concerns are also supportive of demand for the Euro, the single currency softened versus most of its major peers on Thursday. The depreciation was in reaction to disappointing domestic ecostats.
Of particular detriment to demand for the common unit was Eurozone Industrial Production data. March’s annual output of 0.2% was significantly lower than the market consensus. Additionally, the monthly reading showed unexpected contraction of -0.8% despite predictions that output would stagnate.
Industry expert Dennis de Jong said: ‘The Euro had already softened after poor results from the region’s big three economies and could now be in for a tough end to the week. However, there is optimism surrounding the Greek bailout following Monday’s discussions.’
The Pound Sterling to Euro (GBP/EUR) exchange rate dropped to a low of 1.2618 during Thursday’s European session.
Pound Sterling to Euro (GBP/EUR) Exchange Rate Forecast to Hold Gains ahead of Fed Speeches
Given the absence of further British and European ecostats, the GBP/EUR exchange rate is likely to hold gains for the remainder of Thursday’s European session. With that being said, however, there is a chance of Euro volatility in response to several speeches from Federal Reserve officials.
Looking further ahead to Friday, the GBP/EUR exchange rate will likely see significant volatility in response to German and Eurozone Gross Domestic Product reports. In terms of Friday’s British data, Construction Output figures are unlikely to be hugely impactful.
The Pound Sterling to Euro (GBP/EUR) exchange rate reached a high of 1.2726 during Thursday’s European session.
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