The Pound Euro (GBP/EUR) exchange rate made some convincing gains this week, climbing just shy of the one-year high following the Bank of England’s (BoE) latest policy meeting
Pound strengthens as BoE hints at monetary tightening
The Pound got off to a slow start this week, with the currency initially struggling to fend off a stronger Euro as the UK’s latest manufacturing PMI confirmed a slowing of factory activity last month.
Sterling sentiment quickly began to improve as a sustained fall in new coronavirus cases, helped to boost UK economic optimism.
However, the majority of the Pound’s gains were focused in the latter half of the week, in the wake of the BoE’s latest interest rate decision.
While no policy changes were made this month, GBP investors seized on the bank’s policy statement, which suggested that ‘some modest tightening of monetary policy’ may be necessary if the UK economic recovery maintains its current pace.
The Euro, meanwhile, opened the week on strong footing, being bolstered by upbeat Germany retail sales figures and a stronger-than-expected Eurozone manufacturing PMI.
But the single currency was unable to maintain this upside for long, with a resurgence in the US Dollar and some lacklustre EUR data releases, including a shock contraction in German industrial production in June, undermining the appeal of the Euro through the latter half of the week.
UK GDP estimate in the spotlight
Turning to next week’s session, it seems safe to assume the primary focus for GBP investors will be the publication of the UK’s latest quarterly GDP release.
The preliminary estimate for the second quarter is expected to report a strong rebound in economic growth, with analysts forecasting that quarter-on-quarter growth could surge above 5% as the UK economy started to emerge from lockdown.
A strong rebound in growth is likely to reflect well on the Pound and could even propel the GBP/EUR exchange rate to a one-year high next week.
In the meantime, the Euro could face some headwinds in the first half of next week’s session with the publication of Germany’s latest ZEW economic sentiment index.
August’s survey is expected to report another drop in economic sentiment in Europe’s largest economy and may sap EUR demand as a result.