The Pound Euro exchange rate remained highly volatile over the past week, the pairing being rocked by Russia’s decision to close the Nord Stream 1 pipeline indefinitely.
Euro undermined by energy concerns and bleak ECB forecasts
The Pound Euro exchange rate initially strengthened this week, as EUR investors were spooked by the news that Gazprom would be halting all gas flows through the key Nord Stream 1 pipeline.
Analysts fear the move by Russia could lead to European gas shortages in the winter, likely expediting a likely Eurozone recession.
The euro then mounted a convincing recovery in mid-week trade, with the GBP/EUR exchange rate plunging to its worst levels since May 2021 amid growing confidence the European Central Bank (ECB) would raise rate by 75 basis points at its September policy meeting.
While the ECB ultimately delivered a record 75bps hike, it was almost immediately undermined by the bank’s accompanying macroeconomic projections, in which the ECB slashed its 2023 growth Eurozone forecast from 2.1% to just 0.9%.
The Pound, meanwhile got off to a strong start this week as GBP investors welcomed reports that incoming Prime Minister Liz Truss would be freezing energy prices, bolstering hopes for a shallower UK recession.
Sterling then gave ground again on Wednesday as Bank of England policymakers struck a broadly dovish tone as they appeared before Parliament’s Treasury Select Committee.
‘Dovish’ BoE rate hike to weigh on Sterling?
Turning to next week, the spotlight will likely be on the BoE as it delivers its own interest rate decision.
The BoE is widely expected to raise rates by 50bps points at its September meeting. Potentially leaving the Pound on the backfoot as the BoE is likely to be perceived as being behind the curve when compared with the ECB and Federal Reserve.
There will also be a raft of high-profile UK data releases which could infuse volatility into Sterling next week, perhaps the most impactful of which will be the UK consumer price index. Could another sharp acceleration in inflation pile some pressure on GBP exchange rates earlier in the week?
In terms of Eurozone data, the focus for EUR investors is likely to be Germany’s ZEW economic sentiment index, in which another deterioration in morale in the bloc’s largest economy could dent the Euro.
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