Bank Of England

Swings and roundabouts

GBP/EUR exchange rates seesaws on Ukraine concerns and central bank rate speculation

The Pound Euro (GBP/EUR) exchange rate continued to trade in a wide range through the second half of April as developments in Ukraine as well as shifting Bank of England (BoE) and European Central Bank (ECB) interest rate expectations infused the pairing with volatility.

This has seen the pairing trade in a range of between €1.18 and €1.20.

What’s been happening?

The past couple of weeks have seen central banks back in focus, as market expectations for future interest rate hikes from both the BoE and ECB have shifted.

This resulted in the pound stumbling amid a notable fall in BoE rate hike bets after the latest UK retail sales figures reported an alarming plunge in retail sales in March. The worrying fall in sales growth reinforced fears that a fall in consumer spending could leave the UK at risk of a recession in the summer, prompting GBP investors to reprice their expectations for several more rate hikes in 2022.

At the same time, a series of hawkish speeches from ECB policymakers, such as Vice President Luis de Guindos who claimed an interest rate hike in July is ‘possible’ has resulted in EUR investors reassessing their expectations for how aggressively the bank could begin to tighten its monetary policy.

This speculation was stoked by the latest Eurozone consumer price index, which reported inflation in the bloc soared to a new record high in April.

Meanwhile, events in Ukraine have also continued to influence the GBP/EUR exchange rate through the second half of April.

EUR investors were particularly unsettled by Russia’s move to block gas exports to Poland and Bulgaria, amidst fears it could also cut off energy exports to other countries in the EU over their refusal to pay in roubles.

What do you need to look out for?

A key focus over the next couple of weeks will be the outcome of the Bank of England’s May policy meeting.

While the BoE is expected to deliver its fourth consecutive rate hike in May as it seeks to tame domestic inflation, the bank’s forward guidance may act as the main driving force behind the pound.

A cautious outlook from the BoE would undoubtedly dent expectations for future interest rate hikes, and in turn push the GBP/EUR exchange rate lower.

Meanwhile events surrounding the war in Ukraine will continue to have a major impact on GBP/EUR.

This could see the euro face some considerable headwinds if Russia extends its gas export ban to other countries such as Germany.                                       

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