The Pound Euro exchange rate trended broadly lower this week, with the pairing briefly striking a new three-month low.
Euro bolstered by hawkish ECB comments
The Pound Euro exchange rate trended lower through the first half of this week, as the Euro was supported by some hawkish European Central Bank (ECB) rhetoric.
Speaking on Wednesday ECB policymaker Robert Holzmann said: ‘rates will have to rise significantly further to reach levels that are sufficiently restrictive to ensure a timely return of inflation to target.’
The Euro then received a shot in the arm on Thursday as the single currency’s negative correlation with the US Dollar saw it soar as the latter slumped in the wake of the latest US inflation release.
EUR demand then faltered at the end of the week, despite Germany’s 2022 GDP release surprising to the upside.
The Pound, meanwhile, spent most of this week on the defensive, as clouds over the UK economy continued to darken.
However, Sterling then found some relief with the publication of the latest UK GDP figures at the end of the week.
November’s month-on-month figures reported a surprise 0.1% expansion of growth, versus forecasts for a 0.2% slump. The unexpected uptick in growth lead to speculation the UK may have narrowly avoided a recession in 2022 and buoyed Sterling sentiment at the end of the week.
Rising UK inflation to rattle GBP investors?
Looking ahead, a slew of high-impact UK data releases could inject volatility into the Pound Euro exchange rate next week.
The most influential release is likely to be publication of the UK’s consumer price index on Wednesday.
The CPI release is expected to report UK inflation climbed again in December, potentially weighing on the Pound as it likely stokes concerns over pressures on consumer spending and the wider impact on UK economic activity.
On the other hand, Sterling could be buoyed by the UK’s latest jobs figures, if November’s release reports an uptick in wage growth.
Any upside in the Pound could be further supported by the publication of the UK’s latest retail sales figures, which are forecast to report a strong rebound in sales growth in December.
Meanwhile the primary focus for EUR investors is likely to be Germany’s latest ZEW surveys. A continued improvement in economic sentiment at the start of 2023 could reflect positively on the Euro.
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