Home » Pound Euro exchange rate slumps from three-month high on recession warning

Pound Euro exchange rate slumps from three-month high on recession warning

The Pound Euro exchange rate hit a fresh three-month high this week before a recession warning from the Bank of England (BoE) slashed Sterling’s gains. 

Pound slides as BoE forecasts recession 

The Euro was initially muted this week amid some mixed data from the Eurozone. 

Worries that Russia will continue to choke off gas supplies to Europe weighed heavily on the single currency, with many economists expecting the energy crisis to push the Eurozone into a recession. 

EUR was able to claw back some losses mid-week, despite more mixed data and a stronger US Dollar, with which the Euro is negatively correlated. 

Meanwhile, the Pound gained early in the week as markets increasingly priced in a 50-bp rate rise from the Bank of England at its upcoming meeting. 

Worrying economic data began to pressure the Pound as the week went on. The UK’s final services PMI came in below previous estimates, as service-sector expansion slowed to a 17-month low. Additionally, the National Institute of Economic and Social Research (NIESR) warned that the UK was heading for stagflation. 

The BoE decision then saw Sterling tumble. Although the bank did raise rates by 0.5%, it also forecast a UK recession starting at the end of this year and lasting throughout 2023. 

The European Central Bank’s (ECB) economic bulletin was fairly upbeat by comparison. As a result, GBP/EUR fell to a ten-day low. 

Quiet week for data puts domestic political and economic news in the spotlight 

Economic data releases from the Eurozone and the UK are thin on the ground through most of the week. As a result, the Pound and Euro may trade primarily on domestic factors. 

Any fresh concerns about Europe’s energy crisis could hurt the Euro. Meanwhile, GBP investors may continue to mull the implications of the BoE’s rate hike and recession forecast. 

Political uncertainty in the UK may also affect Sterling. The Tory leadership contest continues, with both Liz Truss and Rishi Sunak facing setbacks and scrutiny as they try to woo Conservative Party members. 

On Friday, the UK’s latest GDP data could cause significant movement. While the BoE warned of a recession, it also said it would continue to ‘act forcefully’ if necessary to bring down inflation. A stronger GDP print could boost rate rise bets, while an economic contraction may see Sterling slide. 

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