The GBP/EUR exchange rate traded in a wide range this week as UK political developments rattled the pairing.
Pound rocked by UK political uncertainty
The Pound initially got off to a poor start this week, with the publication of a weaker-than-expected services PMI placing some pressure on Sterling.
GBP exchange rates were then met by some volatility in mid-week trade as Sterling sentiment was rocked by political uncertainty, with investors growing increasingly jittery ahead of the expected publication of the Sue Gray report into the Downing Street ‘partygate’ scandal.
When this report failed to materialise, this allowed the Pound to rally in the latter half of the week and propel the GBP/EUR exchange rate back above €1.20.
Meanwhile, a stronger-than-expected Eurozone manufacturing PMI helped the Euro get off to a robust start this week.
However, the single currency wasn’t able to hold on to these gains for long, with the Euro’s negative correlation with the US Dollar leaving it on the back foot as the latter rallied.
This downturn in EUR exchange rates was reinforced by political jitters in Italy, amidst fears the country’s government could collapse if Mario Draghi resigns as Prime Minister to take up the role of President.
Closing out the week was the publication of Germany’s latest GDP figures, where a larger-than-expected slump in growth at in the last quarter of 2021 placed more pressure on the Euro.
BoE and ECB interest rate decisions in the spotlight
Looking ahead to next week, all eyes will be on the latest interest rate decisions by the Bank of England (BoE) and European Central Bank (ECB).
Of the two, the more influential is likely to be the BoE’s decision, which is widely expected to see the bank raise interest rates again.
But with the hike largely priced in by GBP investors, the focus is more likely to be on the BoE’s forward guidance. If the bank indicates it may continue to aggressively hike rates through 2022 then the Pound is likely to surge.
Meanwhile, it’s likely the Euro could face an uphill battle next week should the ECB remain welded to its dovish bias.
Also influencing EUR exchange rates will be the publication of the Eurozone’s latest GDP figures. Will a slowing of growth in the last quarter of 2021 push the Euro lower?
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