- Pound (GBP) is falling for a second day
- BoE likely to leave rates unchanged tomorrow
- Euro (EUR) is rising despite weaker inflation data
- ECB is expected to leave rates unchanged
The Pound-Euro (GBP/EUR) exchange rate is falling for a second day. The pair fell 0.06% in the previous session, settling on Tuesday at €1.1541. The pair traded between €1.1521 and €1.1558. At 16:00 UTC on Wednesday, GBP/EUR trades -0.03% at €1.1536.
The pound is drifting lower on Wednesday as attention turns to the Bank of England policy decision due tomorrow. The central bank is widely expected to leave interest rates unchanged at 3.75%, even as UK inflation rose to 3.3% year-on-year in March, driven largely by higher fuel prices.
Recent communication from Governor Andrew Bailey suggests policymakers are leaning toward a prolonged pause, allowing time to assess the economic impact of the Iran-related energy shock. While headline inflation has picked up, core inflation eased to 3.1%, supporting the case for patience.
The Bank is likely to look for clearer evidence of second-round effects — where higher energy costs feed into wages and broader pricing — before considering further tightening. At the same time, Bailey has highlighted signs of softness in the labour market, reinforcing the argument for holding rates steady.
Looking ahead, if energy prices begin to stabilise or fall by mid-year, concerns around weakening employment conditions could outweigh inflation risks. The Bank of England has historically looked through temporary, energy-driven inflation spikes, suggesting it may opt to remain on hold if underlying pressures do not broaden.
Attention then shifts to the European Central Bank, which is also expected to keep rates unchanged, with the deposit rate seen at 2.15%.
Recent data from key Eurozone economies has strengthened the case for caution. In Germany, annual inflation edged up to 2.9% in April from 2.8% but came in below expectations of 3.1%. In Spain, inflation eased to 3.2% from 3.4%, pointing to less intense price pressures than feared.
This softer inflation backdrop may allow the ECB to delay immediate tightening. However, President Christine Lagarde is still expected to retain a tightening bias and could signal the possibility of a rate hike as early as June, particularly if inflation expectations remain elevated.
