Pound Euro exchange rate surges on UK economic optimism, cooling Eurozone inflation

The Pound Euro exchange rate shot to a three-month high this week, with the pairing surging on the back of UK economic optimism and cooling Eurozone inflation.

GBP/EUR underpinned by UK economic hopes

The Pound got off to a weak start this week. Lacklustre retail and mortgage figures raised concerns over the UK’s economic trajectory and reflected poorly on the currency.

At the same time, the Euro’s initial gains, stemming from weakness in the US Dollar, were tempered by dovish comments from European Central Bank (ECB) President Christine Lagarde.

The GBP/EUR exchange rate then stabilised with the release of the Eurozone’s consumer price index. November’s preliminary CPI figures reported inflation in the bloc cooled more than expected, weakening bets on how aggressively the ECB might raise interest rates later this month.

This also left the Euro vulnerable to a sharp recovery in the Pound as we entered the second half of the week. This upswing in Sterling was driven by an upbeat market mood as well as the UK’s latest manufacturing PMI. A stronger-than-expected final print last month helped to buoy hopes for a milder UK recession than previously feared.

This uptrend in the GBP/EUR exchange rates then persisted through to the end of the session on the back of a drop in German exports and a weak Eurozone PPI release, with producer prices falling 2.9% month on month in October.

Will weak German industrial data undermine the Euro?

In terms of data the focus next week is likely to be on the publication of Germany’s latest industrial data.

This could push the Euro lower if October’s factory orders and industrial production figures indicate the engine of Germany’s economy continued to slow at the start of the fourth quarter.

EUR exchange rates may also be influenced by developments in Ukraine. Any escalation of the conflict is likely to drag on the single currency.

For GBP investors the spotlight at the start of the week will be on the UK’s latest services PMI. Expect to see the Pound strengthen if November’s finalised figures outperform similarly to the manufacturing index.

Otherwise, any movement in Sterling is likely to be linked to UK economic headlines. Any sign of disruption to the UK economy due to ongoing industrial action could lead GBP lower.

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