GBP/EUR exchange rate rallies to three-week high on dovish ECB

The Pound Euro (GBP/EUR) exchange rate made some convincing gains this week, following on from the European Central Bank’s (ECB) latest interest rate decision. 

Euro plummets as ECB remains reluctant to begin tapering 

The euro faced some notable headwinds this week as EUR investors were left disappointed by the ECB reluctance to start tightening its monetary policy. 

While the ECB announced it would start slowing the pace of its pandemic emergency purchase programme (PEPP), ECB President Christine Lagarde stressed that action does not constitute a tapering of its bond-buying programme, saying: 

‘What we have done today … unanimously, is to calibrate the pace of our purchases in order to deliver on our goal of favourable financing conditions. We have not discussed what comes next.’ 

This completed unwound the Euro’s gains from the first half of the session, which came on the back of some stronger-than-expected German industrial data. 

Meanwhile, the Pound got off to a poor start this week, as Sterling sentiment was undermined by renewed Brexit uncertainty, in addition to concerns over the government’s plans to raise national insurance, after business groups warned the tax hikes could cost jobs. 

However, the Pound fared much better in the latter half of the week, as GBP investors seized on some hawkish comments from Bank of England (BoE) Governor Andrew Bailey, who suggested that the UK economy has met the BoE’s ‘minimum conditions’ for considering whether to begin increasing interest rates. 

Strong UK inflation to propel the Pound higher? 

Looking ahead to next week’s session, there will be a number of high impact UK data releases which at likely to determine the direction of the GBP/EUR exchange rate. 

Perhaps the most impactful will be the UK’s consumer price index, which economists forecast will report a strong uptick in domestic inflation last month. 

This could see the Pound appreciate further next week, as it is likely to bolster speculation the BoE might begin tightening its monetary policy in the near-term. 

Meanwhile the Eurozone’s latest industrial production figures could provide some support to the Euro next week, assuming they reflect the robust activity seen in Germany’s recent figures. 

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