The Pound Euro exchange rate slipped from a nine-month high this week, following the European Central Bank’s (ECB) latest interest rate decision.
Euro recovers following ECB rate hike
The Pound Euro exchange rate initially stumbled this week, with Sterling being undermined by a market correction and UK political jitters, while EUR exchange rates firmed ahead of the ECB’s latest interest rate decision.
GBP/EUR quickly recovered however. The Pound soared after Bank of England (BoE) rate hike bets were turbocharged by strong UK wage growth figures. The euro struggling to hold on to its initial gains, despite an unexpected improvement in German economic sentiment.
A positive UK GDP release extended Sterling’s recovery in mid-week trade. GBP/EUR briefly climbed above €1.17 as the upbeat growth figures further reinforced BoE rate hike expectations.
The euro then bounced back in the latter half of the week as the ECB concluded its latest interest rate decision.
The ECB’s 25bps rate hike was largely priced in ahead of time, so subsequent movement in the single currency was driven primarily by the bank’s forward guidance. This saw the Euro firm as ECB President Christine Lagarde stated another rate hike in July is highly likely.
Hawkish BoE rate hike to turbocharge Sterling?
Turning to next week, the BoE’s own interest rate decision will undoubtedly be the primary catalyst of movement in the GBP/EUR exchange rate.
A 25bps rate hike is largely priced in so any subsequent movement in the Pound will be linked to the bank’s outlook for further rate hikes. Signals that rates might need to rise substantially higher to bring inflation under control are likely to support Sterling.
GBP investors also aren’t ruling out a potential 50bps hike, the delivery of which could trigger an even sharper appreciation of the Pound.
Expectations for a more aggressive hike could be cemented in the run up to the Thursday’s decision, if the UK’s consumer price index reports inflation continued to run hot in May.
Meanwhile, the focus for EUR investors next week will be on the Eurozone’s latest PMI releases. Will an expansion of private sector growth help to lift the Euro?
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