The Pound Euro exchange rate fell sharply this week, mostly as a result of a surprisingly hawkish turn by the European Central Bank (ECB) following its latest interest rate decision.
Euro turbocharged as ECB doesn’t rule out 2022 rate hike
The Euro rocketed higher against the Pound and the majority of its other peers this week, as the ECB’s surprised markets with some hawkish guidance as it concluded its latest policy meeting.
While the bank opted to leave interest rates on hold this month, ECB President Christine Lagarde hinted at a more hawkish approach to monetary policy in the future as she acknowledged the risks posed by rising inflation, as well as declining to report her previous guidance that a rate hike in 2022 is ‘unlikely’
Also supporting the Euro earlier in the week was an upbeat Eurozone GDP release as well as a record rise in inflation, which also fuelled expectations the ECB could start raising interest rates in 2022.
Meanwhile, the Pound got off to a shaky start this week, with the currency being rattled by the fallout from the initial findings of the Sue Gray report into the Downing Street ‘partygate’ scandal.
Sterling then fluctuated in the latter half of the week as the Bank of England (BoE) concluded its first policy meeting of 2022 with a widely expected interest rate hike.
The Pound initially spiked following the announcement on the expectation the bank might accelerate its pace of monetary tightening after four policymakers voted for a more aggressive hike than forecast.
However, these gains faded almost immediately after BoE Governor, Andrew Bailey stated that market should not ‘assume that rates are now on an inevitable long march upwards’.
Weak UK GDP to undermine Sterling?
Turning to next week’s session, the spotlight is more than likely to be on the publication of the UK’s latest GDP figures.
Due to Omicron related restrictions at the end of the year, analysts are forecasting UK economic growth is likely to have slowed in the fourth quarter, which in turn is likely to weaken the Pound.
Sterling is also likely to remain sensitive to UK political developments, with GBP exchange rates likely to drop if pressure on Boris Johnson to resign continues to build.
Meanwhile, the focus for EUR investors at the start of the week will be on the publication of Germany’s latest industrial production figures, with an expected improvement in factory output likely to bolster the Euro.
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