The Pound Euro exchange rate faced heavy selling pressure this week, after a softer-than-expected UK inflation print undermined Bank of England (BoE) interest rate expectations.
Pound plummets as UK inflation cools more than expected
The Pound Euro exchange rate got off to a strong start this week, with initial gains coming on the back of an upbeat market mood.
Sterling then caught fresh bids on the back of the UK’s latest jobs report. A surprisingly strong uptick in UK wage growth bolstered BoE rate hike bets and propelled the GBP/EUR exchange rate to a two-week high.
However, the Pound’s fortunes quickly soured. GBP/EUR plummeted almost a cent on Wednesday following the publication of the UK’s consumer price index.
January’s CPI figures reported domestic inflation cooled more than expected. Sliding from 10.5% to 10.1% versus consensus estimates for a more modest fall to 10.3%.
The softer-than-expected inflation print caused GBP investors to reassess their BoE rate hike expectations and triggered a sharp plunge in Sterling.
Closing out the week was the publication of the UK’s latest retail sales figures. Where a surprise expansion in sales growth helped the Pound bounce off its worst levels.
Meanwhile, the Euro faced headwinds at the start of this week as NATO officials suggested Russia’s spring offensive has already begun.
The single currency was then buoyed later in the week by European Central Bank (ECB) rate hike bets following an uptick in German wholesale prices.
However, these gains were capped by the Euro’s negative correlation with the US Dollar, as the latter strengthened through the second half of the week.
UK and Eurozone PMIs in the spotlight
Turning to next week’s session the focus will be on the latest PMI releases from both the UK and Eurozone.
The UK figures are expected to show growth in the UK’s private sector continued to contract in February. The decline is likely to stoke concerns over first quarter growth and place even more pressure on the Pound.
In contrast the Eurozone PMIs are forecast to report activity in the bloc’s private sector expanded for the second consecutive month. Likely easing Eurozone recession fears and propelling the Euro higher.
Also of note to EUR investors will be the publication of Germany’s latest ZEW economic sentiment index. February’s survey is predicted to report another improvement in sentiment and may further underpin demand for the single currency.
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