The Pound Euro exchange rates rocketed up to its best levels since March 2020 this week, as Sterling sentiment was underpinned by speculation of an early interest rate hike from the Bank of England (BoE).
Pound bolstered by BoE’s hawkish signals
The Pound got off to a strong start this week, on the back of some hawkish comments made by BoE policymaker Michael Saunders, in which he suggested that UK households should brace for ‘significantly earlier’ interest rate hikes, amidst a sharp rise in domestic inflation.
The comments triggered speculation that the BoE could start hiking rates even earlier than previously thought, with some GBP investors even pricing in the possibility of a December hike.
Sterling then fluctuated in the middle of the week after an upbeat jobs report and mixed GDP figures were offset by concerns over shortages of goods in the UK over the Christmas period due to congestion at the ports.
However the uptrend in the Pound then resumed in the second half of the week, with GBP/EUR striking a new post-pandemic low amid Brexit optimism and growing bets on an early rate hike from the BoE.
Meanwhile, the Euro trended broadly lower this week as European Central Bank (ECB) policymakers reinforcing of the ECB’s dovish bias put it in stark contrast to its peers.
Also exerting some pressure on the single currency were some weak EUR data releases, most notably with Germany’s latest ZEW survey, after it revealed economic sentiment in the Eurozone’s largest economy sank to its worst levels since the start of the coronavirus pandemic.
Strong UK inflation reading to extend Sterling’s bullish momentum?
Turning to next week’s session, the focus looks to be on the publication of the UK’s consumer price index.
With concerns over inflationary pressures appearing to be the primary driver behind the BoE’s recent hawkish turn, will another acceleration in inflation catapult the Pound Euro exchange rate even higher?
However any upside in Sterling could be trimmed at the end of the week with the release of the UK’s latest PMI estimates, as a slowing of growth in the private sector will revive concerns over the resilience of the UK’s economic recovery.
Meanwhile, the spotlight for EUR investors will be on the publication of the Eurozone’s own PMI figures, with the Euro potentially stumbling if economic activity in the bloc weakened again this month.
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