The Pound Euro (GBP/EUR) exchange rate made steady gains this week, on the back of some lacklustre EUR data releases and a dovish European Central Bank (ECB).
Euro undermined by weak data and dovish ECB
The Euro stumbled out of the gates this week, coming under pressure due to its negative correlation with the US Dollar, and in response to data showing a surprise slump in German industrial production in January .
This selling bias was further reinforced by the publication of the Eurozone’s latest GDP estimate, which saw growth in the last quarter of 2020 revised from –0.6% to –0.7%
While the Euro made tentative gains in mid-week trade when the US Dollar weakened, this uptick proved to be short lived as the European Central Bank dampened EUR sentiment, after its pledged to ‘significantly’ accelerate its bond purchases following its latest policy meeting.
Meanwhile, the Pound got off to a solid start this week, rallying on Monday on upbeat comments from Bank of England (BoE) Governor Andrew Bailey, who noted economic optimism in the UK is rising steadily.
After maintaining support through the mid-week thanks to the ongoing success of the UK’s vaccination programme, Sterling then made modest gains at the end of the session, after the UK’s latest monthly GDP release reported economic growth contracted less than expected in January as the latest national lockdown came into effect.
BoE in the spotlight next week
Top of the agenda for GBP investors next week looks to be the Bank of England’s latest policy meeting.
No monetary policy changes are expected from the BoE this month, leaving the focus primarily on the bank’s forward guidance.
This could see the Pound maintain its positive trajectory next week, with the GBP/EUR exchange rate even potentially passing $1.17, if the BoE strikes a broadly upbeat tone when addressing the impact of Boris Johnson’s reopening roadmap.
Meanwhile the focus for EUR investors at the start of next week will be the latest ZEW surveys from Germany, which could provide some support for the Euro if economic sentiment in the Eurozone’s largest economy is shown to have continued to improve this month.
This will be followed by the Eurozone’s consumer price index later in the week. This could prove less supportive of the single currency however as February’s final reading looks set to confirm inflation in the bloc stalled last month.