The GBP/EUR exchange rate climbed through October. It moved up from late September, nearing the 1.2000 mark. This puts sterling at the top end of its historical range since Brexit.
The European Central Bank (ECB) kept its interest rate steady, but the Bank of England (BoE) is expected to hike theirs next week. So, does this rally have more steam?
What the ECB Hold Means
On Thursday, the ECB unanimously voted to hold its deposit rate at 2.50% , even after talking about a potential increase. Eurozone inflation stood at 3.8%, so this move wasn’t a surprise.
ECB President Christine Lagarde said they haven’t seen any risk of inflation causing “second-round effects” yet. Without a clear plan for December, the euro probably won’t get much new support.
How Strong Are Sterling’s Fundamental Drivers?
Sterling’s strength seems mainly driven by the interest rate difference. The Bank of England kept its Bank Rate at 3.75% after a 6-3 vote in September.
After UK inflation hit 3.5% in September, higher than forecasts, economists largely expect a 25-basis-point hike on November 5th. That’d make a 150-basis-point gap between UK and Eurozone policy rates.
But sterling’s recent run is not just about those rate differences. The latest UK Budget was delivered without much upset to gilt markets. That helped ease any potential fiscal risk premium that might have hurt Sterling.
High energy costs, tighter financing, and political uncertainty in some Eurozone countries have also made the euro less appealing.
Technical signals show the GBP/EUR pair’s recent climb has pushed it into extended territory. For most of October, the pair’s daily RSI has stayed in overbought territory, something we haven’t seen often in recent decades. While overbought conditions usually don’t halt a trend by themselves, they frequently come before consolidation periods.
Risks of a Near-Term Pullback?
We can’t rule out unexpected developments impacting the pound. Weaker-than-expected UK labor market or inflation figures, a bigger economic slowdown, or even stabilizing Eurozone fiscal conditions boosting the euro , could all trigger a short-term reversal.
The near-term outlook for GBP/EUR really depends on the BoE’s November 5th decision and the economic data that follows.
If the BoE raises rates and signals the start of a measured tightening cycle, it would likely cement sterling’s lead, possibly pushing it past 1.20. But if the BoE takes a more cautious stance, or data shows a dip in UK economic momentum, we could see a downward correction.
What major central bank decision influenced the GBP/EUR exchange rate in yesterday’s session?
The European Central Bank left its benchmark interest rates unchanged at 2.65%, offering no fresh hawkish signals and allowing Sterling to gain relative momentum.
Where is sterling getting its strength against the euro?
A likely 25-basis-point BoE hike to 4.00% on 5 November would widen the rate gap over the ECB’s 2.50% to about 150 basis points.
What is the key near-term event for GBP/EUR?
The Bank of England’s 5 November rate decision will be closely watched for signals on further tightening and its impact on the interest-rate differential.
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