The Pound Euro exchange rate bounced off a seven-month low this week as rising tensions between Russia and the EU saw the Euro slide.
Euro drops as Russia-Ukraine crisis rattles EUR investors
The Euro started the week strong as EUR investors were relieved that Vladimir Putin did not declare all-out war on Ukraine during his Victory Day speech.
As the week went on, the single currency wavered in a narrow range. Energy security fears offset hawkish comments from policymakers at the European Central Bank (ECB) as Ukraine halted some Russian gas supplies to Europe.
Volatility then followed as the Euro surged to a seven-month high against a weakening Pound before EUR came crashing back down.
After EU member state Finland signalled its intention to apply for Nato membership, the Kremlin warned that Russia would retaliate. Following the earlier interruption in gas flows via Ukraine, this latest flare-up reminded EU investors just how rapidly the current crisis could deteriorate further.
Meanwhile, Sterling enjoyed some dip-buying on Monday after last week’s Bank of England (BoE) inspired slump. This kept GBP level against a rising Euro.
The UK currency then wobbled throughout much of the week. A generally upbeat market mood buoyed the Pound, while downbeat retail sales figures and renewed concern over the Northern Ireland protocol pressured it.
After tumbling amid a bout of risk aversion in Wednesday’s overnight trade, Sterling then surged higher against the Euro, despite UK GDP unexpectedly contracting by 0.1% in March.
The upside came as an oversold Pound attracted some dip-buying, while GBP also benefitted from some flows away from the Euro as European investors ditched the single currency.
Potential for volatility amid Ukraine crisis, Brexit concerns and high-impact data
Looking ahead to next week’s trade, Eurozone data is fairly sparse. Therefore, EUR could trade primarily on headlines surrounding the Russia-Ukraine crisis. If tensions rise further over the prospect of Finland and Sweden joining Nato then the single currency could decline.
Meanwhile, the Pound faces some high-impact data releases, starting with the UK’s unemployment rate on Tuesday.
Perhaps the most important release is Wednesday’s CPI for April. Economists expect UK inflation to have jumped from 7% to an eye-watering 9.1%. While higher inflation may force the BoE to keep hiking rates, it could also spell disaster for the UK economy. As a result, GBP may slide.
Finally, we have the UK’s April retail sales on Friday. If they show growth, it may bolster GBP, but another decline will only add to Sterling’s woes.
Brexit news may also play a big part in GBP/EUR. If the Northern Ireland protocol dispute escalates, the Pound could suffer.
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