The Pound Euro exchange rate rallied this week, with the pairing coming within a whisker of €1.20 as concerns over European energy security weighed heavily on the single currency.
Euro undermined by gas shortage fears
The Pound Euro exchange rate strengthened this week, largely as a result of a EUR selling bias.
The slump in the Euro came as Russia’s Gazprom implemented another cut in gas exports through the Nord Stream pipeline to Germany, reducing flows to just 20% of the pipeline’s total capacity.
This sparked warnings that Europe will face a gas shortage and need to ration supplies over the winter, reviving fears the Eurozone is hurtling toward a recession.
These concerns also saw Germany’s IFO business climate index slump to a two-year low, which also weighed on the Euro at the start of the week.
The end of the week then saw the publication of the Eurozone’s latest GDP and CPI figures, with a stronger-than-expected second GDP print and acceleration of inflation in July helping the Euro to claw back some of its losses.
Meanwhile the pound drew support amid growing confidence that the Bank of England (Boe) will accelerate the pace of its interest rate hikes at its next meeting.
However, these gains were tempered by ongoing political uncertainty, in addition to concerns the UK economy could face severe disruption in the coming weeks amid widespread industrial action.
BoE interest rate decision centre stage next week
Turning to next week’s session it’s safe to assume the BoE’s latest interest rate decision will act as a key catalyst of movement in the Pound Euro exchange rate.
With a 50bps rate hike largely priced in the focus for GBP investors will be the BoE’s accompanying economic forecasts and forward guidance.
This could see Sterling stumble if the bank’s outlook for the UK economy remains relatively bleak or if the bank is cautious in its messaging regarding future hikes.
Meanwhile, a key focus for EUR investors will be on Germany’s latest industrial data as another slowdown in the economic heart of the Eurozone’s largest economy is likely to reflect poorly on the Euro.
In addition to this the single currency is likely to remain highly sensitive to any more reports
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