Pound V euro: GBP hits 7-month high on Bank of England rate hike optimism

THE pound to euro exchange rate has hit another best level on Thursday, thanks to rising hopes for a Bank of England (BoE) interest rate hike in 2018.

Finance expert: Euro hits record high ahead of ECB meeting

The GBP/EUR pairing has been trading in the region of €1.149, while the pound to US dollar exchange rate is also at its best level since the EU Referendum.

Recent UK wage growth and employment figures have shown rising earnings and more people in work, raising hopes for one or more interest rate hikes this year.

The BoE has previously been cautious when considering raising interest rates, as households with high debt would have a harder time making repayments.

Because wage growth is rising and inflation is slowing, however, economists are now upgrading their rate hike forecasts, leading to a pound to euro rate rise.

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The pound to euro exchange rate has hit another best level

Among those adjusting their outlooks is Kallum Pickering, Senior UK Economist at Berenberg Bank.

He said: “According to market pricing, the BoE is set to hike the bank rate once again towards the end of the year.

“In our view, this still seems inconsistent with the BoE’s data dependant approach and outlook for GDP and wage growth.

“It is becoming increasingly difficult for the BoE to justify its ultra-accommodative policy stance.

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The pound euro exchange rate has been trading in the region of €1.149

It is becoming increasingly difficult for the BoE to justify its ultra-accommodative policy stance

Kallum Pickering, Senior UK Economist at Berenberg Bank

“We therefore look for two hikes in the Bank Rate in 2018, one in Q2 and one in Q4, followed by one in Q3 2019.”

While today has brought good news about the German economy, the euro has continued to trade in a narrow range against the pound.

The GfK German consumer confidence reading has risen for February, while statistics company IFO also reports a better business climate outlook.

The main factor dragging on the euro is this afternoon’s European Central Bank (ECB) monetary policy meeting, the first of 2018.

The ECB isn’t expected to change interest rates from the current 0 per cent, but could indicate that monetary policy tightening is on the way.

The Bank of England explains the exchange rate

ECB President Mario Draghi will be in the spotlight when he addresses the press at a scheduled conference.

The ECB generally moves slowly when changing monetary policy, so traders will be keeping an eye out for hints and suggestions from Draghi, rather than any concrete statements.

On Friday morning the pound could decline against the euro if UK GDP estimates for the fourth quarter show a downgrade.

Current forecasts are for lower GDP growth for the year-on-year reading, which could dent the current optimism about UK economic stability.

As mentioned above, this afternoon’s ECB monetary policy meeting will be the next significant factor to affect the euro’s value.

If Mr Draghi does open the door to tighter monetary policy from the ECB in 2018, the euro to pound exchange rate could rise considerably.

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