Pound Euro exchange rate strikes one-month high on dovish ECB rate decision

The Pound Euro exchange rate climbed to a new one-month high this week in the wake of the European Central Bank’s (ECB) latest interest rate decision.

Euro slumps following ECB rate decision

The Pound Euro exchange rate got off to a slow start this week as the UK and most parts of the Eurozone were closed for the May bank holiday.

Sterling then faltered after UK markets reopened on Tuesday as the UK’s latest manufacturing PMI pointed to signs of easing inflationary pressures.

At the same time, EUR exchange rates wavered on the back of a mixed Eurozone inflation print. While headline inflation ticked higher, core inflation cooled, casting uncertainty over ECB monetary policy.

The GBP/EUR exchange rate then rebounded in mid-week trade, with Bank of England (BoE) rate hike bets buoying the Pound and EUR investors growing cautious ahead of the ECB’s interest rate decision.

The ECB’s rate decision then pulled the Euro lower. While the ECB raised rates by 25bps as expected, the bank did not explicitly commit to further hikes, which was quickly picked up on by EUR investors.

Closing out the week was the publication of Germany’s latest factory orders figures, with the Euro extending its post-ECB losses following a startling 10.7% contraction in order growth at the end of the first quarter.

BoE rate decision to infuse volatility in the Pound?

Centre stage next week will be the conclusion of the BoE’s May policy meeting.

The BoE is also widely expected to deliver a 25bps rate hike this month, in what will be the bank’s 12th consecutive hike since December 2021.

This is also forecast to be the BoE’s last hike of its current tightening cycle. However stubbornly high UK inflation has led some GBP investors to suggest more action may be needed from the bank.

If the BoE leaves the door open to raising interest rates past May expect to see the Pound roar higher.

Also of note to GBP investors will be the publication of the UK’s latest GDP figures. The preliminary estimate for first quarter growth could sap Sterling sentiment at the end of the week if it reports a stalling of quarter-on-quarter growth.

In the meantime, the focus for EUR investors next week will be on German data, starting with the country’s latest industrial production figures on Monday. Will a slump in factory output in March leave the Euro on the back foot at the start of the session?

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