Both the Bank of England (BoE) and the European Central Bank (ECB) will announce their latest interest rate decisions on Thursday, with the potential to drive volatility in GBP and EUR exchange rates.
At the time of writing, GBP/EUR is trading just shy of a five-month high. Meanwhile, both GBP/USD and EUR/USD are around two cents below the multi-year highs struck at the end of January.
What are the BoE and ECB expected to do?
Both central banks are expected to leave interest rates on hold, leaving the focus on their forward guidance.
The ECB could raise concerns that the euro’s strength against the US dollar could see inflation soften, potentially opening the door to further cuts.
Meanwhile, the BoE could strike a slightly more hawkish tone as inflation rose to 3.4% in December, well above the British central bank’s 2% target.
How could this impact GBP and EUR?
If the BoE sounds wary of cutting rates too quickly, considering how high inflation is currently running, Sterling could strengthen.
However, investors will also look to the bank’s accompanying inflation and economic forecasts. If these show that price pressures are expected to ease rapidly over the coming months as the economy slows, the pound could stumble.
As for the ECB, concerns over the euro’s strength could prompt some EUR selling, particularly if the Eurozone’s preliminary consumer price index for January – due out Wednesday– shows inflation dipping from 1.9% to 1.7%, as forecast.
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