Home » UK economic uncertainty infuses volatility into the GBP/EUR exchange rate

UK economic uncertainty infuses volatility into the GBP/EUR exchange rate

The Pound Euro (GBP/EUR) exchange rate traded in a wide range this week, amidst rising concerns that some underlying weakness in the UK economy could stifle the country’s economic recovery. 

Pound fluctuates amidst rising UK economic uncertainty 

Trade in the Pound was mixed this week, amidst ongoing uncertainty over the resilience of the UK’s economic recovery. 

After initially trending in a narrow range as an extended bank holiday weekend in the UK resulted in thin trading conditions in Sterling, GBP exchange rates weakened through the middle of the week, in response to concerns over domestic labour shortages and supply chains issues. 

GBP investors grew increasingly concerned about how these underlying problems could impact economic activity in the UK in the coming months, weakening the appeal of the Pound. 

Despite no clear catalyst for the move, Sterling was then able to claw back a good portion of these losses in the second half of the week. 

The Euro, meanwhile, enjoyed strong support through the first half of this week, rallying on the back of some positive Eurozone data releases, including a stronger-than-expected inflation reading and drop in unemployment, which resulted in some hawkish speculation over the European Central Bank’s (ECB) upcoming policy meeting. 

This uptick in EUR exchange rates was further reinforced by the Euro’s strong negative correlation with the US Dollar (USD) as the latter faced a sustained selling bias through much of the week. 

However, the single currency then relinquished some of these gains in the latter half of the session, following a shock contraction in Eurozone retail sales growth. 

Will the ECB announce a cut to its PEPP next week? 

Looking ahead, it seems safe to assume that the main catalyst of movement in the GBP/EUR exchange rate next week will be the ECB’s latest policy meeting. 

In light of recent positive Eurozone data releases, analysts polled by Reuters now believe that the ECB could announce plans to start reducing its pandemic emergency purchase programme (PEPP), in the last quarter of 2021, a move which may buoy the Euro. 

Influencing EUR exchange rates in the meantime will be the publication of Germany’s latest ZEW economic sentiment index, with the single currency potentially facing some headwinds if economic morale continued to decline this month. 

Meanwhile, the focus for GBP investors next week will be on the publication of the UK’s latest GDP release. 

The latest monthly figures could put some pressure on the Pound through the latter half of next week as economists forecast, they will report that growth in the three-months to July. 

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