ECB's de Galhau and Bank of England's Pill Confirm Rate Hikes Are Done

Images Copyright: Pound Sterling Live, ECB, World Economic Forum / Benedikt von Loebell.

The Pound to Euro exchange rate rose to test 1.15 on Thursday after a European Central Bank Governing Council member confirmed further rate hikes were not required.

Eurozone interest rate rises are "over", said Bank of France governor Francois Villeroy de Galhau.

The admission was enough to encourage markets to bring forward expectations for Eurozone rate cuts, which can also provide headwinds for the Euro's recent rally.

Villeroy de Galhau added to the 'dovish' overtones by stating the Eurozone is "winning the battle against inflation".

"Barring a surprise or a shock, the rise in our key rates is over," he added, while predicting inflation would return to the ECB's 2% target by 2025.

However, as is the case with all central bank guidance at present, a caveat that it is "too early to talk about cutting" was added.

Despite this caveat, the big picture is clear: the next move is most likely a rate cut, and the timing will be crucial for currency markets.

If the ECB cuts rates before the Bank of England, the Pound-Euro can be better supported. But the Pound also squared up to similar messaging headwinds, with Bank of England Chief Economist Huw Pill saying today that the rise in UK interest rates means financial conditions are "already restrictive".

"Having established monetary policy in restrictive territory, it is not the case we have to raise rates," Pill told a virtual UK Regions Economic Summit.

He maintained a view that interest rates will remain "at this restrictive level for quite an extended time... sustaining rates at restrictive levels will bear down on inflation".

Pill grabbed attention on Monday when he said in another appearance that the market's expectations for rate cuts by the summer of 2024 were reasonable.

The market has recently raised bets for UK rate cuts in 2024, lowering UK bond yields relative to elsewhere and weighing on the Pound's performance.

The market has moved significantly to 'price in' UK rate cuts for 2024 already, which might explain why the Pound was more sanguine to near-identical messaging from these two central bank heavyweights.