The GBP/EUR exchange rate fluctuated last week, with the pairing witnessing some particularly notable movement following the European Central Bank’s latest policy meeting.

Euro Fluctuates as ECB Pushes Back Next Rate Hike

The Pound to Euro exchange rate initially slumped this week, with Sterling sentiment softening after the UK’s manufacturing and construction PMIs both fell into contraction territory in May.

However the pairing then picked itself back up in the mid-week, with GBP investors relieved to hear that the UK’s service sector continued to expand last month (abet modestly), while the single currency was rocked by the European Commission’s recommendation that Italy be hit by disciplinary measures in response to Rome’s refusal to comply with EU fiscal rules.

The most significant shift in GBP/EUR then came on Thursday, with the pairing falling sharply after the ECB’s June policy meeting.

This saw EUR investors cheer the generous terms of the ECB’s new TLTRO funding scheme, despite the bank pushing out the boat for its next rate hike to at least the second half of 2020.

However the Euro struggled to hold on to its gains at the very tail end of the week as it was undermined by a sharp fall in German industrial production in April driven by a dramatic collapse in exports.

Heightened Political Uncertainty to Rock the Pound?

Looking ahead to next week, we expect to see trade in the GBP/EUR exchange rate become increasingly erratic next week as political uncertainty in the UK is expected to be kicked up a notch as the Conservative leadership race officially begins.

This could put significant pressure on Sterling should a hardline Brexit supporter appear to take an early lead in the contest for fears this will increase the chances of a no-deal Brexit.

However potentially offering some support to the Pound will be the release of the UK’s latest employment figures, with analysts forecasting that wage growth may have ticked higher again in May.

Meanwhile, the Euro cold face some pressure next week depending on how Italy’s debt drama continues to unfold, with a defiant Rome likely to stoke volatility in the single currency.

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