The Pound Euro exchange rate slumped to a ten-week low during this week’s session as worries about the UK economy rattled GBP investors.
Pound slides on UK economy woes, Euro enjoys positive data
The Euro started gaining ground early this week thanks to some upbeat German data. Germany’s Ifo business climate indicator improved more than expected this month, while consumer confidence heading into January also showed a larger-than-forecast rise.
Hawkish comments from two European Central Bank (ECB) policymakers added to the upside. In particular, ECB Vice-President Luis de Guindos said, ‘Increases of 50 basis points may become the new norm in the near term’, raising expectations of further interest rate rises and thereby boosting the Euro.
However, the common currency’s gains may have been limited by Russia-Ukraine worries. Russian President Vladimir Putin reaffirmed his plans to continue the invasion indefinitely.
Meanwhile, the Pound faced selling pressure throughout the week, with GBP investors growing increasingly concerned about intensifying strike action. Workers across the UK are staging walkouts to demand better pay amid the cost-of-living crisis, causing significant disruption.
Rising government borrowing costs added to Sterling’s woes. UK public sector borrowing unexpectedly jumped to £22bn in November – a record high for the month – raising fears about the state of the public finances.
The Pound extended its losses after the final third-quarter GDP data revealed a larger-than-expected contraction in the UK economy.
Trading conditions thin over Christmas
Looking at the week ahead, trading conditions are likely to be thin over the Christmas period. Due to the lack of notable economic data and market closures, GBP/EUR movement may be limited. That said, there are a few factors that could impact the Pound Euro pair.
Sterling could continue to come under pressure if domestic economic headlines remain downbeat. With the UK government ruling out better pay offers, further industrial action could hurt GBP.
As for the Euro, Russia-Ukraine worries could affect the single currency. Will fears of another escalation in the conflict dent EUR exchange rates?
Additionally, risk appetite could play a role. If we see a Santa rally in markets, the riskier Pound could recoup some losses against the safer Euro. However, with many causes for concern heading into 2023, markets may remain downbeat.
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