The Pound Euro exchange rate slumped to a two-month low this week. The pairing striking as low as €1.15 after EUR investors were cheered by the announcement the EU is preparing an ‘emergency measures’ to deal with soaring energy costs.
Euro bolstered by energy market optimism
The Pound Euro exchange rate tumbled roughly two cents over the past week, most in response to the EU’s promise to intervene in energy markets and rein in prices.
EUR investors cheered the announcement, particularly as it triggered an almost immediate pullback in European energy prices.
Reinforcing the upside in the Euro was the publication of the Eurozone’s consumer price index.
August’s preliminary figures reported Eurozone inflation spiked to a new record high of 9.1%, stoking expectations the European Central Bank (ECB) may raise interest rates by 75bps at its September policy meeting.
Meanwhile, the pound came under sustained selling pressure this week amid an increasingly bleak outlook for the UK economy.
This was partly linked to a new forecast from Goldman Sachs in which the US investment bank suggested domestic inflation could top 22% in 2023, while also repeating the Bank of England’s (BoE) warning that the UK will slip into a recession in the fourth quarter.
Euro poised to soar if ECB delivers a 75bps rate hike
Looking ahead to next week, the spotlight will undoubtedly be on the ECB’s latest interest rate decision.
While there is no doubt that the ECB will follow up July’s hike with another interest rate increase this month, the question for EUR investors will be just how aggressive the bank is willing to be.
A 50bps rate hike from the ECB seems largely priced in and would match up with the bank’s forward guidance in July. However there more than an outside chance that policymakers could keep their foot on the accelerator and opt for a 75bps hike. In which case we are likely to see the Euro spike.
Meanwhile, Liz Truss is widely expected to enter office as the next Prime Minister in the UK next week.
GBP investors will be looking to the new PM to deliver a new fiscal package to help shield UK households from a massive rise in energy prices at the start of next month. If Truss’ support package is poorly received the Pound is likely to fall.
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