Euro to Pound Exchange Rate (EUR/GBP) Rises Above Key 0.80 Threshold Once More, More Gains Ahead?

Markets had geared up for the possibility of an interest rate rise in late 2014 thanks to an increasingly hawkish sounding BoE.

However, on Tuesday the BoE's bigwigs appeared before the Treasury Select Committee to update parliament on their thinking; and the message appears to be they are still not confident enough to raise interest rates in 2014.

• The pound to euro exchange rate (GBP/EUR) is seen trading 0.17 pct down on a day-to-day basis following the event at 1.2459.
• The euro pound rate is therefore quoted at 0.8028.

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How did the BoE hurt the pound sterling?

Exchange rate markets were looking for a repeat of Governor Carney's Mansion House message where he told markets they had been too conservative in their predictions of when the first rate hike would take place.

Fast-forward a week and the message is cooler.

"With the wisdom of hindsight, what we got wrong was that we were on the upper end of expectations on growth. We expected productivity growth to pick up much more rapidly than it has," says Carney hinting that the productivity of the UK labour force does not yet warrant an interest rate rise.

Jeremy Cook, chief economist at World First says:

"After the first 20 minutes of the appearance in front of the Treasury Select Committee it is clear that Governor Mark Carney has decided to row back some of the surprising hawkishness in his recent Mansion House speech.

"Speaking 12 days ago, Carney said that home owners and businesses should be prepared for interest rate rises and that the first of these "could happen sooner than markets currently expect.

"Today’s comments however have continued with a similar tone to his previous communications in that spare capacity in the labour market will be difficult to overcome, that wage pressures will come through eventually but remain poor at the moment and, as a result, inflationary pressures are not an issue at the moment. This lack of a normalising inflation expectation leads to a lack of a normalising of monetary policy and hence the GBP weakness this morning.

"I said the day after the Mansion House speech that it seemed strange and out of character. I can now add that it should be largely forgotten and I maintain that interest rates will not rise in 2014 unless a notable increase in real wages is seen."

Long term prospects favour the GBP over the EUR

Today's moves confirm the declines in the euro pound rate have are over for now. The question becomes how far will the recovery rally go?

According to Piet Lammens at KBC Markets much of the euro's recent strength has to do with spill-over from the EUR/USD, as this cross rate bottomed out.

"However, the downside of sterling (both against the dollar and the euro) remained well protected, as several BoE members kept the door open for an early rate hike. Some short-term consolidation might be on the cards. Even so, we maintain our LT EUR/GBP negative bias. 0.7755 (2012 low) is still the key reference level medium term," says Lammens.