Pound to Euro Rate Can Fall to 1.1650 as Bank of England Set to Signal Imminent Rate Cuts

Image © Adobe Stock

The Pound to Euro exchange rate could trade with a heavy tone through May as it becomes clear the Bank of England will consider cutting interest rates in June.

The Bank’s next interest rate decision is next Thursday. Interest rates will be kept unchanged at 5.25%, but economists expect it to signal impending rate cuts.

This is a clear risk to the Pound given the market is not prepared for early cuts. In fact, money market pricing shows the investment community is only really prepared for a first cut in August.

Volatility in Pound exchange rates is likely as there remains a great deal of uncertainty as to when the Bank of England will proceed with interest rate cuts due to the widely divergent set of views on the matter amongst the Bank’s policy setting committee.

Some, such as Governor Andrew Bailey and Dave Ramsden appear keen to cut soon, while others such as Chief Economist Huw Pill and Megan Greene have recently indicated they would prefer to wait. Catherine Mann and Jonathan Haskel are certainly not yet ready to entertain cuts, if their recent comments on the matter are anything to go by.

“Having voted as a bloc in recent years, the five internal members appear less united than before. Several days after Ramsden’s surprisingly dovish speech, Huw Pill struck a markedly more hawkish tone, suggesting the monetary policy outlook hadn’t changed since his previous speech, when he had said that rate cuts were “some way off,” says Andrew Goodwin, Chief UK Economist at Oxford Economics.

Robert Howard, a Reuters market analyst, says if there is to be a rate cut in June, it will likely be delivered by the narrowest of margins, 5-4, with chief economist Huw Pill and “external” hawks Megan Greene, Jonathan Haskel and Catherine Mann opposed.

Above: GBP/EUR at daily intervals. Track GBP/EUR with your own custom rate alerts. Set Up Here

The European Central Bank (ECB) is set to cut interest rates in June, but such a decision would hardly shake the Euro given it has long been expected. The Federal Reserve is expected to cut later in the year owing to strong U.S. economic data.

“The BoE’s outlook appears somewhat more uncertain, as the MPC has seemingly become more divided over the need for early rate cuts,” says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

This means there will be ‘new news’ on the UK rate outlook next Thursday, and ‘new news’ can move currency markets.

With market pricing not fully accounting for a potential June interest rate rise, we would anticipate that expectations can move in this direction. Expect this to pressure UK bond yields relative to those in the Eurozone and U.S., which will weigh on the Pound.

“We expect the Monetary Policy Committee to reiterate that rate cuts are coming soon,” says Goodwin.

He says whether the cut comes in June or August is a close call, and the extent to which market pricing responds could be key.

“In the hiking cycle, the MPC showed a reluctance to go against market expectations. So if markets remain hawkish, the MPC is likely to err on the side of caution and wait until August,” he explains.

This uncertainty should mean any Pound-Euro weakness is ultimately contained, with the prospect of an August hike likely to see support maintained.

The Pound to Euro exchange rate could, therefore, test the lower end of the 2024 range (1.1650) in the event that Thursday’s decision is a ‘dovish’ one before it tests the topside again if developments in subsequent weeks point to an August rate cut.