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- Reference rate GBP / EUR at publication:
- Location: 1.1745
- Bank transfers (indicative guide): 1.1434-1.1516
- Specialist money transfer rate (indicative): 1.1640-1.1686
- More information on obtaining specialized rates, here
- Set up an exchange rate alert, here
The pound-euro exchange rate (GBP / EUR) closed at its highest level since mid-August, driven by continued outperformance in UK bond yields as investors anticipate higher interest rates at the Bank of ‘England.
The British pound was the subject of a midweek offer by a market that re-emphasizes the UK’s outperformance advantage over the Eurozone, which in turn needs to strengthen expectations of a Bank of England interest rate hike in early 2022.
The GBP / EUR exchange rate closed at 1.1749, the last time it closed above here was August 16.
This is a reminder that forays above 1.17 tend to be short lived as the market is dominated by selling interest at these levels. Data from Pound Sterling Live shows that those who watch the exchange rate for retail purposes have set 1.17 as the desirable trade level, which means their order will be triggered when the spot market hits the 1 range. , 1730-1.1750. (See the best euro rate today).
Potentially working in favor of the pound bulls lately is evidence of investor bets favoring the strength of the pound.
Bets will have been closed the week before when the British Pound fell sharply against all major currencies, with GBP / EUR falling to 1.1550 at one point.
Some analysts have said that an obstacle to the further rise of the pound is the number of “long” positions formed over time, which has the effect of stifling a currency’s advance.
But the shift in positioning seen in the last week of September may have wiped out some of that surplus, allowing the currency to become more receptive to the UK interest rate history.
“Inflation combined with more active consumer and labor markets in the UK has prompted the Bank of England to consider a possible rate hike later this year,” said Charles Porter, SGM Foreign Exchange Ltd.
“This puts the UK in a privileged position and ahead of much of the rest of the slower moving G-10 group,” he adds.
Above: British ten-year yields (top) and German ten-year yields (bottom). Images courtesy of FT.com.
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Inflation expectations are strengthening in the UK amid an ongoing economic recovery, supply side pressures, labor shortages and record vacancies.
Bank of England Governor Andrew Bailey said in a speech on September 27 that he believed the current spike in inflation was transient, but he was increasingly concerned that it might take hold elsewhere in the economy, to the extent that it creates a self-fulfilling loop.
“Provided that the rising cost of money, basic consumables, factors of production and lower disposable income derived from taxation and inflation do not manifest enough to stifle the UK consumer and investor, the pound could be a quid pro quo, ”Porter says.
UBS AG forex strategists say the market will likely refocus on the hawkish tone the Bank of England set at its September policy meeting, where it said interest rates could rise even before the end of quantitative easing.
This suggests that a rate hike could happen even before the end of the year, depending on how the economy performs over the next few weeks.
“We see clearer arguments for a rebound in the pound against other major G10 currencies in the near term, including the dollar, and continued gains against the euro and Swiss franc in the medium to long. term, supported by a faster tightening of the BoE, “said Gaétan Peroux, strategist at UBS AG.
A key indicator to watch is the UK labor market, where unemployment is expected to rise in October with the end of the government’s employment support program, potentially forcing staff on unem- ployed leave.
The consensus is that the Bank could move towards a rate hike if the rise in unemployment turns out to be lower than their expectations.
A robust labor market increases the potential for rising wages, which are inherently inflationary.
Expectations of higher inflation levels in the future would potentially encourage workers to push for higher wage settlements, thereby helping inflation to anchor at levels above the Bank’s 2.0% target. .