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GBP/EUR Exchange Rate Drops To One-Week Low

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The Pound Euro (GBP/EUR) exchange rate slumped to a one-week low on Thursday morning as GBP traders braced for the Bank of England (BoE) interest rate decision.

At the time of writing, GBP/EUR was trading at around €1.1548, having bounced off a one-week low of €1.1525.

Pound (GBP) Exchange Rates Fade ahead of BoE Decision

The Pound (GBP) fell sharply as Thursday’s trade began as GBP investors grew increasingly anxious ahead of the BoE interest rate decision.

Markets had been pricing in a 75bps rate rise from the British central bank, which would be its largest rate rise since 1989.

However, news in October that the government was delaying its fiscal statement, alongside the forecasts from the Office for Budget Responsibility (OBR), cast doubt on the BoE decision. Without knowing the government’s fiscal policy plans, or how the OBR believes they will impact the economy, the BoE is left somewhat in the dark.

In addition, it’s difficult to say whether a smaller or larger rate hike is desirable for the Pound. Usually, higher interest rates boost the respective currency as they attract investors seeking a strong return.

But we saw this correlation invert following the mini-budget, when soaring government bond yields and huge interest rate expectations saw Sterling slump to an eight-month low against the Euro (EUR) and a record low against the US Dollar (USD). As rate hike expectations receded and markets stabilized, the Pound strengthened.

bannerOne reason for this is that higher interest rates will likely deepen and extend a UK recession, which many economists believe has already begun.

Against this bleak and uncertain backdrop, the Pound dropped as European trade began on Thursday.

The UK’s final services PMI failed to provide the Pound with any support. Although it came in higher than preliminary estimates, it still revealed a contraction in the country’s vital services sector.

Euro (EUR) Exchange Rates Strengthen on Jobs Data and ECB Comments

Meanwhile, the Euro was enjoying support following hawkish comments from European Central Bank (ECB) President Christine Lagarde.

The ECB chief said that a recession in the Eurozone would not be enough to bring down record-high inflation, indicating that the bank may continue raising interest rates aggressively at upcoming meetings.

In addition, the latest Eurozone unemployment rate also underpinned EUR exchange rates. Unemployment refreshed its record low in September, pointing to ongoing strength in the bloc’s labor market as it recovers from the Covid pandemic.

This, in turn, suggests that the employment landscape is strong enough to endure further rate rises, thereby adding to ECB rate rise bets.

GBP/EUR Exchange Rate Forecast: Pound Sterling to Slump on BoE Warning?

Looking ahead, the BoE decision is in focus. We could see significant volatility in GBP/EUR as markets react to the decision, the bank’s forecasts and forward guidance, and the implications for the UK economy.

A 75bps hike could initially boost the Pound, while a smaller half-point hike may dent it. However, initial movements could prove deceptive as markets digest the impact of higher interest rates on the coming UK recession.

Additionally, if the bank sounds a warning over the severity of the coming recession – which could be worse following the chaos of the government’s mini-budget in September – the Pound may tumble further.

The calamitous mini-budget created a £30bn black hole in public spending, which will likely lead to tax hikes and spending cuts. Tighter fiscal policy, tighter monetary policy and surging inflation all conspire to tip the UK into a deep dark recession. If the BoE confirms this with bleak forecasts, Sterling could slide.