The Pound Euro exchange rate traded in a wide range over the past week, with the pairing briefly falling to its worst levels since March 2020. 

Pound rocked by Brexit and economic uncertainty, BoE rate hike 

The Pound stumbled through the first half of this week, undermined by underwhelming UK macroeconomic releases. 

This saw a surprise contraction in UK economic growth in April, in addition to a rise in unemployment and weaker-than-expected rage growth over the same period raise fresh concerns over the UK’s economic trajectory. 

This downside was reinforced by renewed Brexit uncertainty as the EU launched legal action against the UK, after the UK government unveiled a bill aimed at unilaterally altering the Northern Ireland protocol. 

The Pound then bounced back in the middle of the week as its initial slump made it an attractive prospect to more price conscious investors. 

The Bank of England’s (BoE) rate decision then extended this recovery. While the bank only raise rates by a modest 25bps, its hint that it may accelerate its tightening cycle in the future was enough to buoy Sterling. 

Meanwhile the Euro, initially strengthened this week after European Central Bank (ECB) policymaker Klaas Knot suggested the bank is likely to raise interest rates by 50bps in September and pursue two additional hikes in October and December. 

However, these gains proved short-lived as EUR investors were underwhelmed by the lack of concrete plans from the ECB to address concerns over fragmentation in the bond market issue. 

Also weighing on the Euro were fresh concerns over European energy security after a sharp fall in Russian gas exports to the continent. 

Soaring UK inflation to damage Sterling? 

Looking ahead, it seems safe to assume that the primary catalyst of movement in the GBP/EUR exchange rate next week will be the publication of the UK’s consumer price index. 

The latest CPI figures are likely to report another bump in UK inflation last month. Another surge on the levels seen in April would likely spook GBP investors as it would stoke concerns over the UK’s cost of living crisis. 

Also of note to GBP investors will be the release of the UK’s retail sales figures on Friday. An expected slump in sales growth would likely feed into fears that consumer spending is faltering and that the UK could be at risk of a recession. 

In the meantime, the publication of the Eurozone’s latest preliminary PMIs could offer some support for the Euro, if private sector activity in the bloc remained robust this month. 

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