The stars were aligned last week for a great pump on GBP exchange rates- with the BoE expected to raise rates by 25bps, we were all ready for the 1.20 handle to be pierced following the announcement- and in all fairness, this is exactly what happened.
Following the BoE interest rate hike (Bringing the UK interest rate up to 0.5%) we saw the Pound rally against the Euro up to 1.2070- and GBPUSD exchange rates rise to 1.3740. We immediately saw banks begin pricing in interest rates to be well above 1% by end of the year- and rumors of the next BoE rise to be 50bps. As you are all probably aware, the reason Central Banks are having to hike exchange rates so aggressively is due to the rising inflation we are seeing due to food and energy; at this point, it is not slowing down or showing signs of reversal, so for now- raising rates is the best course of action.
Unfortunately, the Sterling rally was extremely shortlived due to the ECB being a lot more hawkish than anyone expected at their meeting- changing their stance from inflation being “transitory” to now saying “risks to the inflation outlook are tilted to the upside”- implying that the ECB will also have to look at raising rates, as early as June of this year (Important to note that the interest rate is negative currently). This announcement sent GBPEUR exchange rates back to the 1.18 area and EURUSD up to 1.1450 after being as low as 1.11 just one week ago.
So after these announcements- what can be expected from GBPEUR exchange rates? My personal opinion is that the hawkish stance from the ECB may not stick- and the fact that GBPEUR bottomed at 1.18 is a good sign, providing UK data remains strong, we should see the price track back up to the 1.20 area again. GBPUSD is still very much reliant on what the Fed does, with a 50bps interest rate hike priced in for March, we could well see the rate drop to the low 1.30’s again before any meaningful rise.