Euro To Pound Exchange Rate Stuck As BoE And ECB Hike Bets Unwind

The Pound and Euro remained rangebound at the start of June as investors scaled back expectations for further Bank of England and ECB tightening, leaving EUR/GBP anchored near 0.87 while attention shifts to this week’s US jobs report for clues on the Federal Reserve’s next move.

BoE and ECB Hike Expectations Fade

Expectations for rate hikes from the BoE and ECB have faded. The BoE may not hike at all.

EUR/GBP has stayed steady around 0.87 as domestic drivers in the UK and Eurozone are similar.

Jobs data in the US this week could sway the Fed towards hikes.

Markets start June and a new week on a firm footing, despite headlines of fresh missile strikes in the Middle East.

Oil is higher by over 3%, but stocks are flat to higher, and currencies are mostly flat; there is little sign of panic or “risk off,” and that may relate to growing fatigue of the peace deal news flow and the shift from “peace deal imminent” to escalation and back again.

Against this backdrop, currencies such as the pound and euro have had similar domestic drivers as central banks and governments have had to deal with rising energy costs and rising inflation.

Markets initially priced in a flurry of rate hikes, but have scaled back expectations as inflation has risen less aggressively than feared, and oil has eased slightly.

That is particularly true in the UK as an initial expectation of 80bps in hikes has eased to around 30bps.

This has been helped by BoE comments and by data such as last week’s CPI and jobs data that suggested hikes are not imperative.

Hike Expectations Fade

Markets have dramatically scaled back their expectations for aggressive BoE monetary tightening.

At one point, market participants were aggressively pricing in over 80 basis points of interest rate hikes from the central bank for the current calendar year.

However, that figure has now collapsed to just 33 basis points of tightening as inflation anxieties begin to cool across the United Kingdom.

While central bank communications have driven this repricing, a drop in international oil prices has also played a major structural role in dampening near-term price pressures.

Governor Andrew Bailey solidified the Bank’s stance during a high-profile economic address on Friday.

Governor Bailey explicitly noted that the central bank could look through temporary above-target inflation, as long as second-round effects did not emerge within the broader domestic economy.

This strategic guidance indicates that policymakers are willing to tolerate near-term headline price spikes driven by external supply shocks, provided that wages and core domestic pricing remain anchored.

To gauge whether these secondary pressures are taking root, institutional investors are looking closely at the upcoming Decision Maker Panel survey on Friday, which will reveal critical corporate CPI expectations.

Usually this dovish repricing of expectations would weigh on a currency, but the pound has held up well as the same in happening in the Eurozone. EURGBP has stayed anchored around 0.87.

The ECB are almost certain to hike this month, but that is only 25bps and would not move the needle much.

Markets have priced in 44bps of hikes this year, which is only slightly more than the expectations for the BoE.

Importantly, the ECB are hiking from a much lower level than the BoE. Indeed, the BoE were initially expected to keep cutting rates this year and the current 3.75% is historically quite high.

Given the domestic drivers are very similar, EURGBP may stay around the 0.87 level for some time until there is a marked policy divergence.

EURUSD and GBPUSD may be more volatile, and this week’s US jobs report could liven things up.

The data has stabilized/improved and the estimates for Friday are probably right about where the market wants them – 4.3% unemployment, headline NFP around 100K, and AHE at 0.3%.

Weak data could lead to a temporary dip in the USD but is likely regarded as a one-off.

Strong data won’t change rate cut expectations (there aren’t any) so it shouldn’t be a big deal for now, but if the labour market tightens considerably, inflation could be a problem.

One major danger comes from AHE wage growth, given the inflationary backdrop. Do employees start demanding higher wages, leading to a wage-price spiral?

Under that scenario, the Fed would have to consider hikes and the dollar could build a sustained rally.