The Pound Euro exchange rate rallied sharply over the past week. The pairing striking its best levels in almost a month amid rising Bank of England (BoE) rate hike expectations.
Pound surges on upbeat UK data
The Pound Euro exchange rate shot higher this week, appreciating roughly two cents as investors digested some high impact UK data releases.
The upswing in Sterling was initially driven by the UK’s latest jobs report. While unemployment remained on hold in November, average earnings beat expectations.
The stronger-than-expected wage growth release stoked expectations the BoE will need to continue to raise interest rates, expectations for which propelled GBP/EUR higher on Tuesday.
Sterling’s upward momentum was then extended through the middle of the week by the publication of the UK’s consumer price index.
The CPI release reported inflation slowed again in December, dropping from 10.7% to 10.5% as expected. While this was further evidence the UK may have turned a corner in the fight again inflation, price growth remained in double digits.
This reinforced BoE rate hike bets and propelled GBP/EUR above €1.14 for the first time in 2023.
However, the Pound ran into some headwinds at the end of the week as a shock contraction in UK retail sales undermined fourth quarter growth expectations.
Meanwhile, shifting European Central Bank (ECB) rate hike expectations infused volatility into the Euro this week.
EUR exchange rates plummeted on Tuesday after Bloomberg published a report suggesting the ECB may look to slow the pace of its monetary tightening following its February interest rate decision.
The euro attempted to rebound after ECB policymakers including President Christine Lagarde sought to push back against these rumours, but these gains proved short-lived.
UK and Eurozone PMIs in the spotlight
Turning to next week’s session the focus will be on the latest UK and Eurozone PMI releases.
The UK figures could see the Pound reverse some of its recent gains as economists forecast January’s preliminary figures will report the UK’s private sector continued to shrink, likely stoking UK recession fears.
In contrast the Euro could rebound next week if the Eurozone’s own PMI figures indicate the bloc’s private sector avoided a contraction at the start of 2023.
Also influencing EUR exchange rates will be Germany’s latest IFO business climate index. Will another improvement in business confidence this month also reflect positively on the Euro?
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