Pound Euro exchange rate hits two-month high on UK optimism and dovish ECB

The Pound Euro exchange rate rose to a two-month high this week as Rishi Sunak became the UK Prime Minister, restoring stability to UK markets.

Pound recovers as Rishi Sunak enters Number 10

The Euro strengthened as this week’s trade began, with EUR investors betting on a large interest rate rise from the European Central Bank (ECB) later in the week. However, dismal PMI reports may have capped EUR’s gains.

The single currency was then muted through most of the week, leaving it vulnerable to losses. The subdued tone came as German business sentiment dropped to its lowest level since May 2020, although it did exceed forecasts.

On Thursday, the Euro fell further as the ECB decision disappointed EUR traders. Although the bank hiked by 75bps, its rhetoric was less hawkish than anticipated, leading markets to scale back bets for further rate rises.

More dovish comments from ECB officials dented EUR on Friday, despite better-than-forecast German data.

Meanwhile, the Pound stumbled out of the gate on Monday after the UK’s dismal PMI surveys indicated that the county is already in a recession.

However, Sunak’s swift appointment as Prime Minister saw Sterling rally through the remainder of the week. As a safe pair of hands and a unifying figure, Sunak restored credibility and stability to UK markets.

GBP initially trimmed its gains on Friday before rocketing up to hit a two-month high. An upbeat turn in markets supported the increasingly risk-sensitive Pound.

Bank of England decision could cause turbulence for the Pound

Looking ahead to the coming week, high-impact Eurozone data could drive the GBP/EUR exchange rate through the first couple of days.

On Monday we have the flash results for the bloc’s October inflation rate and third-quarter GDP growth rate. Economists expect Eurozone inflation to ease and GDP growth to slow, which could put significant pressure on the Euro.

Thursday brings the Pound’s big event of the week – the Bank of England (BoE) interest rate decision. Markets are torn between another 75bps rise or a smaller half-point hike from the British central bank. But with Sunak having delayed the government’s fiscal statement, there is some uncertainty, which may see erratic movement.

A smaller rate hike could dent GBP while a larger rise may support Sterling.

Meanwhile, political and geopolitical factors could drive volatility. Positive or negative news from the Russia-Ukraine war will likely support or undermine EUR, respectively.

As for the Pound, any tremors of political instability could spook GBP investors.

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