GBP/EUR exchange rate strengthens as Eurozone suffers record contraction in GDP

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The Pound to Euro (GBP/EUR) exchange rate trended higher this week, after the Eurozone reported a record slump in GDP in the second quarter.

Euro Undermined by Sharp Contraction in Q2 Growth

The Euro initially got off to a strong start this week, strengthening on the back of upbeat German business morale and benefiting from its negative correlation with the US Dollar, amidst a persistent USD selling bias.

However, the single currency was unable to hold on to these gains in light of the latest GDP figures from Germany and the Eurozone.

Up first was the German GDP release, with a larger-than-expected contraction of growth in the second quarter, alongside a surprise slide into deflation in July weighing heavily on EUR exchange rates.

This was quickly followed by the Eurozone’s growth figures, putting more pressure on the Euro as the bloc suffered a record slump in GDP in Q2.

The Pound meanwhile enjoyed some notable support over the past week, with the currency benefiting from some end-of-month flows as well as the broad weakness of many of its peers.

BoE in the limelight, will the Bank offer its thoughts on negative rates?

Turning to next week’s session, a key catalyst of movement in the GBP/EUR exchange rate looks to be the Bank of England’s (BoE) latest policy decision.

While no policy changes are expected from the BoE following its August meeting, GBP investors will be keeping a close eye on the bank’s forward guidance. Expect this to dent the Pound if there is any clear hint towards negative interest rates.

Also of note for GBP investors will be July’s finalised PMI release, with Sterling sentiment potentially improving if they confirm UK business activity soared to a five-year high.

The Euro, meanwhile, may also be influenced by the Eurozone’s own PMI release, potentially strengthening if July’s final figures are revised higher.

However the real focus for EUR investors is likely to be on Germany’s latest industrial data.

This may help to bolster the Euro through the second half of next week if German factory orders and industrial production continued to expand at a solid pace in June.

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