British GBP/EUR Exchange Rate Strengthens, Outlook Boosted by US Rate Rise Promise
The pound sterling (GBP) has seen its near-term fortunes against the euro improve dramatically.
The euro has held the advantage over recent days as markets simply failed to find any reason to buy the British pound.
Step in US Fed Chair Janet Yellen.
Yellen told the University of Massachusetts that he majority of the Federal Open Market Committee (FOMC), including Yellen, expect a 2015 lift-off to interest rates.
Markets had all but resigned themselves to a rate rise taking place in 2016 following the September FOMC meeting that prompted a fresh bout of US dollar selling.
The US Dollar and British pound however turned higher overnight following the supportive comments from Yellen.
The US central bank chief said a rate hike in 2015 is “likely appropriate”, adding that most on the FOMC share this view.
Yellen said below-target inflation to “transitory factors” and warned that waiting too long to begin tightening may stoke excessive price growth and leverage.
Latest Pound/Euro Exchange Rates
  | Live: 1.1391▼ -0.13%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1004 - 1.1049 |
**Independent Specialist | 1.1232 - 1.1277 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Why is This Important for the Pound Sterling?
Currency markets are ultimately driven by the divergence in policy between global central banks, and by raising rates the US Fed is expanding the gulf between it and other central banks that are cutting rates.
Markets widely believe that the Bank of England will only start raising interest rates after the US Federal Reserve.
So the sooner the Fed lifts off the sooner the Bank of England will lift off - hence markets are buying the British pound.
The announcement of a rate-hike in the United States could now fall in October or December, providing the kind of future anchoring event for the markets they have been sorely lacking this week.
But - Will the BoE be Swift to Follow?
The big risk the the pound sterling’s outlook is if the market gets a hint that the BoE is in no hurry to follow the lead of the US Fed.
If the words of Andy Haldane - Chief Economist at the Bank of England - are anything to go by then the GBP could be at risk.
Haldane told an audience in Northern Ireland that in his view, "the case for raising UK interest rates in the current environment is some way from being made."
Haldane acknowledged the solid UK domestic demand and on track economic recovery, but he also outlined some the key downside risks, including early indicators of a possible slowdown in growth.
He concluded that, were some of the downside risks to materialise, there could be a need to loosen rather than tighten monetary policy.
The Bank's caution on raising rates too quickly is apparent and thus provides a key risk to those hoping for a stronger pound to euro exchange rate.
Euro Week Ahead: Watch Inflation
Germany & Euro Area Sep CPI (29 & 30 Sep) will dominate the near-term picture for the euro.
Analysts at TD Securities say they are looking for a small upside surprises to the German and Eurozone CPI releases.
"For both, we expect readings of 0.1% y/y versus consensus of 0.0%, and a similar risk for core Eurozone CPI, which we expect to come in at 1.0% y/y vs consensus of 0.9% y/y. With energy prices having declined so much this year, inflation is expected to remain well below the ECB’s 2.0% goal for some time to come," say TD Securities.
