The Pound Euro exchange rate fell sharply this week, shedding roughly two cents in response to the Bank of England’s (BoE) warning of a two-year long recession
Pound plummets on bleak BoE forecasts
The Pound nosedived this week, with the GBP/EUR exchange rate relinquishing almost all of the gains made since Rishi Sunak became Prime Minister.
This plunge in Sterling was triggered by the BoE as it concluded its latest interest rate decision.
While the BoE met expectations by delivering a 75bps interest rate hike – its largest increase in 33 years – this was overshadowed by the bank’s bleak economic forecasts for the UK.
The bank warned the UK is already in a recession and that this downturn could last up to two years. Alongside BoE Governor Andrew Bailey’s claim that interest rates aren’t likely to rise as sharply as markets have priced in, this plunged the Pound sharply lower against the Euro and the majority of its other peers.
At the same time, the Euro’s gains were capped by its negative correlation with the US Dollar, as the latter shot higher following the Federal Reserve’s own interest rate decision.
The single currency also struggled to find any meaningful support on the back of some mixed Eurozone data releases. While inflation in the Eurozone rocketed to a record high of 10.7% in October, the finalised manufacturing and services PMI releases from the bloc both came in below expectations
Slump in UK GDP to extend Sterling losses
The Pound could face additional selling pressure next week with the publication of the UK’s latest GDP figures.
The preliminary growth figures for the third quarter are forecast to report a contraction in the UK economy.
Confirmation that the UK economy is entering a prolonged slowdown could see the GBP/EUR exchange rate retest a low of €1.13.
In the meantime, the release of the Eurozone’s latest retail sales figures could buoy the Euro in the first half of next week. September’s release is expected to report sales growth rebounded after previously contracting for three consecutive months.
However any upside movement in the Euro may remain limited so long as the war in Ukraine continues to escalate.
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