Currency News from Currencies Direct

  • GBP/EUR boosted by hawkish BoE policy outlook

    The last four weeks have been rather mixed for the pound, with Brexit-based uncertainty tempering the impact of a more hawkish Bank of England (BoE) policy outlook.

    As a result, the GBP/EUR exchange rate climbed to a nine-month high of €1.14 before retreating once again as market confidence diminished.

    Continued US dollar softness has helped to shore up the euro, meanwhile, even as the odds of an imminent Federal Reserve interest rate hike have increased.

    What’s been happening?

    Although the BoE voted unanimously to leave interest rates on hold at its February policy meeting the mood towards the pound nevertheless improved in the wake of the decision.

    This was due to the more hawkish nature of the latest quarterly Inflation Report, which saw an upward revision to the Bank’s growth forecasts.

    Investors took this as encouragement to bet on the prospect of the BoE raising interest rates again in the coming months, most likely at the May policy meeting.

    However, the less encouraging nature of January’s raft of UK PMIs and persistent uncertainty relating to Brexit limited the strength of the pound.

    Comments from chief EU negotiator Michel Barnier prompted a particularly sharp retreat for GBP exchange rates, as he noted that a transition deal is still ‘not a given’.

    With markets still lacking any particular sense of clarity over the Conservative government’s aims for its future relationship with the EU the appeal of the pound remains relatively fragile.

    Confidence in the euro, on the other hand, picked up on the back of news of a breakthrough in German coalition talks.

    The prospect of an end to four months of political limbo gave the euro plenty of cause for cheer, even if the Eurozone economy showed signs of having lost some of its momentum at the start of 2018.

    Nevertheless, with the European Central Bank (ECB) looking set to maintain a rather dovish policy outlook in the near term the upside potential of the euro was still somewhat diminished.

    What do you need to look out for?

    Developments surrounding Brexit are likely to remain the major influence on the GBP/EUR exchange rate for some time to come.

    Unless Theresa May’s government can offer some greater sense of clarity on the issue the pound’s ability to strengthen is likely to be restricted.

    If the Eurozone economy demonstrates fresh signs of strength in February’s raft of PMIs, meanwhile, the euro could find further cause to strengthen.

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