- Pound (GBP) is falling, giving back yesterday’s gains
- The market is expecting too many rate hikes
- Euro (EUR) is rising but falls against the USD
- The ECB also warns against acting too quickly on inflation
The Pound-Euro (GBP/EUR) exchange rate is falling, givng back yesterday’s gains. The pair rose 0.26% in the previous session, settling on Wednesday at €1.1478. The pair traded between €1.1436 and €1.1490. At 09:30 UTC on Thursday, GBP/EUR trades -0.19% at €1.1456.
The pound is falling against both the euro and the US dollar after President Trump’s address to the nation yesterday dampened hopes of de-escalation in the Middle East conflict and sent oil prices sharply higher.
The UK economy remains highly exposed to rising energy prices due to its dependence on imported energy, which — combined with a weak growth backdrop and fragile public finances — leaves sterling in a vulnerable position.
While markets are still pricing in the possibility of Bank of England rate hikes, there is a credible scenario in which the BoE chooses to look through the initial energy shock and the resulting spike in inflation, unless it begins to generate more persistent second-round effects through wages, services inflation, or inflation expectations.
Unlike in 2022, the UK economy today has more slack, weaker underlying demand, and a softer labour market, suggesting the Bank of England may have more room to tolerate an externally driven inflation shock without tightening policy aggressively.
Bank of England Governor Andrew Bailey has also reinforced this view, pushing back against markets getting ahead of themselves by pricing in a series of rate hikes this year.
The euro is rising against the pound but falling against the US dollar.
Like the UK, the eurozone is also heavily reliant on imported energy, meaning Trump’s comments — which have reduced hopes of de-escalation and pushed oil prices higher — are also negative for the region’s economic outlook.
While markets are still pricing in ECB rate hikes, policymakers have reiterated that they stand ready to act if needed, but have also stressed that it is still too early to determine what policy response will be required in upcoming meetings.
Data released earlier this week showed that eurozone inflation rose sharply to 2.5% year-on-year in March, up from 1.9% in February, marking the fastest increase since 2022.
However, core inflation unexpectedly eased to 2.3% year-on-year, which should provide some reassurance to the ECB and may reduce pressure for an immediate aggressive policy response.
