The Pound Euro exchange rate fell back this week, erasing a good portion of the previous week’s gains amid hopes Europe’s recent banking crisis could be over.
Euro buoyed as Europe’s banking sector stabilises
The Pound Euro exchange rate trended lower at the start of this week as EUR investors appeared relieved over a deal brokered by the Swiss government for UBS to acquire its troubled rival Credit Suisse.
The Euro then extended these gains as this relief, in addition to some hawkish rhetoric from European Central Bank (ECB) policymakers, bolstered ECB rate hike bets.
In contrast, Sterling sentiment tumbled at the start of the week as GBP investors were split on whether or not the Bank of England (BoE) would raise interest rates this week.
The Pound then found gains in the middle of the week on the back of the UK’s consumer price index. As an unexpected rise in domestic inflation reignited BoE rate hike expectations.
However, the GBP/EUR exchange rate failed to consolidate these gains as a sharp drop in the US Dollar lead to a strengthening of the Euro due to the negative correlation between the pairing.
Sterling then stabilised in the wake of the BoE’s rate decision. The bank raised rates by 25bps, and suggested more tightening may be on the table if price growth remains persistent. A slightly more hawkish than expected outlook from the BoE was warmly received by GBP investors.
The end of the week saw the release of the UK and Eurozone’s latest PMIs. March’s preliminary figures reported UK private sector growth was outperformed by the Eurozone’s, but despite this the GBP/EUR exchange rate was able end the session on a positive note.
Strong Eurozone inflation to boost the Euro?
Turning to next week’s session the focus will be on the Eurozone’s latest CPI figures. If inflation in the Eurozone continues to run hot it may bolster ECB rate hike bets and lift the Euro.
The UK’s latest GDP figures are expect to confirm the UK avoided slipping into a recession at the end of 2022 and may offer support to the Pound at the end of next week.
In the meantime, notable GBP data will be thin on the ground, leaving the focus on domestic concerns. Will the apparent resolution of Brexit help to underpin Sterling sentiment?
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