The Pound Euro exchange rate fell back this week amid further signals from the European Central Bank (ECB) that it will begin to raise interest rates from July.
Euro buoyed by ECB rate hike expectations
The Euro got off to a strong start this week following comments from ECB President Christine Lagarde, in which she signalled the bank is set to raise interest rates in July and September.
These gains were reinforced later in the week as one of Lagarde’s colleagues suggested a 50 basis point hike might be on the table for July.
EUR exchange rates then faltered in mid-week trade after Germany’s consumer confidence index held close to a record low.
The Euro was quick to find its feet again later in the session as a drop in the US Dollar helped to bolster demand for the single currency.
Meanwhile, the Pound suffered a sharp selloff in the first half of the week following the release of the UK’s latest PMI figures.
May’s preliminary figures revealed a sharp plunge in Service sector growth, which stoked recession fears and saw the GBP/EUR exchange rate shed almost a cent on Tuesday.
However, Sterling was then able to claw back some of these losses through the second half of the week.
This was aided by the publication of Sue Gray’s report into Downing Street lockdown breaches, which proved to be less damning for Boris Johnson than some GBP investors have feared.
Sterling then managed to hold on to these gains after the size of Chancellor Rishi Sunak’s cost of living support package exceeded expectations.
Eurozone inflation in the spotlight
Turning to next week’s session, the primary catalyst of movement in the GBP/EUR exchange rate is likely to be the publication of the Eurozone’s consumer price index.
May’s preliminary CPI figures are forecast to report Eurozone inflation has continued to accelerate, likely helping to reinforce ECB rate hike expectations and boost the Euro.
However the single currency could face some headwinds ahead of the CPI release. The Eurozone’s latest economic sentiment index is expected to report morale remained weak this month amid ongoing concerns over the war in Ukraine and rising commodity prices.
Meanwhile, a shortened week of trade due to the extended Jubilee weekend is likely to result in thin trading conditions in the Pound, potentially leaving the currency vulnerable to losses.
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