GBP/EUR Rate Rallies as Single Currency Slips Over ECB Uncertainty

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The Pound to Euro exchange rate rallied sharply on Tuesday after the single currency turned broadly lower alongside European government bond yields in the wake of a press report casting doubt whether the European Central Bank (ECB) will raise its interest rate as far as many had expected.

Europe's single currency fell widely with particularly heavy losses against the Swiss Franc, New Zealand Dollar and Sterling on Tuesday while bond yields tumbled after Bloomberg News reported the ECB might disappoint economist and market expectations for its interest rate in March. 

"The EUR has sold off on the story, unsurprisingly given the rates market had been pricing in close to 150bp of hikes by mid-year," says Dominic Bunning, head of European FX research at HSBC.

"Further EUR weakness on signs of the ECB backtracking on its hawkish stance might be more acute against currencies where central banks have been more cautious in their rate hike guidance. GBP, for example," Bunning writes in a subsequent Tuesday commentary.

Economists and interest rate derivative markets had assigned a high probility to two successive half percentage point increases being delivered over the course of February and March but Tuesday's anonymously sourced report warned of the prospect for a smaller increase in March.

Above: Pound to Euro rate shown at hourly intervals with EUR/USD and EUR/CHF. To optimise the timing of international payments, consider setting a free FX rate alert here.

ECB President Christine Lagarde had indicated in December that European interest rates would likely rise in half percentage point increments over the coming meetings and this 'hawkish' position has been an important weight around the ankles of the Pound to Euro rate ever since then. 

"Positive European growth news means ECB hawkishness is more clearly positive for the Euro because it reduces sovereign risks," writes Michael Cahill, a G10 FX strategist at Goldman Sachs.

"EUR/GBP has trended higher this year; we expect that trend to extend but tactically we prefer to be short GBP/CHF as it also benefits from SNB hawkishness and provides a hedge against possible BTP pressures," Cahill and colleagues wrote in an earlier market commentary. 

The recently more cautious approach taken by the Bank of England (BoE) has also been a burden for the Pound too, though Tuesday's press report and earlier released employment figures from the UK might be an early indication of the balance of risks shifting to the upside for GBP/EUR.

"Short GBP vs peers is too much of a consensus trade for us to put capital to work in it. However, if the story of 2023 is a continued rise in EGB [European government bond] yields, EUR/GBP may continue to slowly grind higher," says Jordan Rochester, a strategist at Nomura, also earlier on Tuesday. 

Previously, Office for National Statistics figures suggested a sturdy December labour market in which pay growth rose further to levels that might be of increased concern for the inflation-targeting BoE, and even more so if forthcoming inflation figures suggest stubbornly high price pressures.

UK inflation is seen falling from 10.7% to 10.5% when December data is released on Wednesday and 6.3% to 6.2% once energy and food items are removed from the basket of goods for which prices are analysed, though there are many factors that could slow its descent back to the 2% target.

Such factors include, among other things, a forthcoming April increase for the government's energy price cap and last year's depreciation of Sterling against many trade partner currencies including the Euro. 

Above: Pound to Euro rate shown at daily intervals. If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.