The Pound Euro exchange rate enjoyed strong support this week as a cooling of Eurozone inflation sapped European Central Bank (ECB) interest rate expectations.
Euro pressured as Eurozone inflation cools sharply
After a quiet start to the week, due to an extended bank holiday weekend, the Pound Euro exchange rate marched relentlessly higher.
The initial upside in GBP/EUR was driven by hawkish Bank of England (BoE) rate hike bets. A growing consensus that the BoE will need to raise rates to 5.5% by the end of 2023 proved to be a strong source of support for Sterling.
At the same time, the Euro was pressured after Eurozone economic sentiment deteriorated more than expected in May and raised warnings regarding the outlook for the bloc.
The pullback in the Euro then accelerated later in the week, with the GBP/EUR exchange rate being catapulted to a new five-month high.
EUR exchange rates faltered as data showed inflation in the Eurozone cooled at a faster-than-expected pace in May. The underwhelming inflation figures lead to a repricing of ECB rate hike expectations.
Meanwhile, BoE rate hike speculation continued to underpin the Pound through the latter half of the week.
German industrial data in the spotlight
Turning to next week, the publication of Germany’s latest industrial releases will likely be the most impactful releases at the start of the week.
These could provide a boost to the Euro as they are expected to report factory orders and industrial production rebounded in April. Boosting hopes the Eurozone’s largest economy will have gotten off to a stronger start in the second quarter.
The Euro could run into resistance in the second half of the week as the Eurozone publishes its latest GDP estimate, amid the risk that first quarter growth in the bloc will print below expectations after German Q1 growth was revised sharply lower.
Meanwhile, in the absence of any notable UK data releases, any movement in GBP exchange rates is likely to remain sensitive to BoE rate hike bets. So long as nothing puts a dampener on bets the Pound is likely to sustain its upward momentum.
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