The Pound Euro exchange rate traded in a wide range over the past week as rate hike hints from the European Central Bank (ECB) and UK political uncertainty infused volatility in the pairing.
Euro fluctuates on hawkish ECB guidance
The Euro initially stumbled this week, undermined by concerns over Ukraine and on the back of a surprise slump in German factory orders.
However, the single currency then bounced back on Wednesday as EUR investors were pleasantly surprised by the Eurozone’s latest GDP estimate. Growth in the first quarter being revised up from 0.3% to 0.6%.
The Euro then sought to extend this recovery in the second half of the week following the ECB’s latest interest rate decision.
The ECB signalled it will pursue a 25bps rate hike in July and that a larger hike might be warranted in September depending on the inflation outlook. However the resulting spike in the Euro proved short lived as the ECB also cut its Eurozone growth forecast for 2022.
The Pound fluctuated through the first half of the week, as a result of heightened UK political jitters.
This was driven by a vote of no-confidence vote against Prime Minister Boris Johnson. Sterling initially gains ahead of the vote on the hopes a decisive victory for the PM would help ease UK political uncertainty.
However, a narrower-than-expected victory only made this uncertainty more pronounced, leading to fresh volatility in GBP exchange rates.
The latter half of the week then saw the Pound undermined by warnings over UK growth. The OCED and British Chamber of Commerce both warned that the UK economy is likely to grind to a halt over the next couple of years.
BoE rate decision in the spotlight next week
Turning to next week’s session, the primary catalyst of movement in the GBP/EUR exchange rate may be the Bank of England’s (BoE) own interest rate decision.
With another rate hike from the BoE largely priced in the focus will be on the bank’s forward guidance. Will a cautious outlook from the bank push the Pound lower?
Also influencing Sterling will be the latest UK jobs report. While unemployment is expected to have remained unchanged in April, a fall in wage growth could push GBP exchange rates lower as it is likely to revive cost-of-living concerns.
Meanwhile, Germany’s latest ZEW economic sentiment index could weigh on the Euro at the start of next week, if investors morale remains broadly downbeat.
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