The Pound Euro exchange rate came under heavy selling pressure this week, in response to signals from the Bank of England (BoE) that it may be ready to call time on its interest rate hikes.
Pound plummets on hints UK interest rates may have peaked
The Pound Euro exchange rate opened this week’s session on strong footing following the news the UK and EU had reached a new deal to resolve a dispute over the controversial Northern Ireland protocol.
It’s hoped the so-called ‘Windsor Framework’ will boost the UK economy by leading to more amicable trade relations between the UK and EU in the future.
Optimism over the deal was able to catapult the GBP/EUR exchange rate to a three-week high.
However, the Pound subsequently came crashing back to earth following a speech by Bank of England (BoE) Governor Andrew Bailey.
Speaking in London Bailey cast doubt over an expected 25bps rate hike from the BoE in March as he appeared to suggest UK interest rates may have already peaked. GBP/EUR shed over a cent in response to the remarks.
Waning BoE rate hike bets then left Sterling to languish through the second half of the week.
Meanwhile the euro initially struggled to hold its ground against the Pound this week after the Eurozone’s latest economic sentiment index printed below forecast.
However, the single currency quickly found its footing after French, Spanish and German inflation all printed above forecast. The data stoked suggestions inflation in the Eurozone might be a little stickier than previously thought and bolstered European Central Bank (ECB) interest rate expectations.
The Euro then traded sideways through the latter half of the week amid a resurgence in the US Dollar.
Weak German industrial drag to drag on the Euro?
The publication Germany’s latest industrial data may act as a headwind for the Euro through the first half of next week.
Factory orders and industrial production are both forecast to have contracted in January and could stoke fears Germany is at risk of slipping into a recession in the first quarter of 2023.
Meanwhile GBP investors will be focused on the publication of the UK’s latest monthly GDP figures. Will a rebound in growth in January could allow the Pound to recoup some of this week’s losses?
Elsewhere a likely House of Commons vote on the ‘Windsor Framework’ will be closely watched by markets as any setbacks could undermine Rishi Sunak’s position as Prime Minister.
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