Home » Pound Euro exchange rate rocked amid fears BoE will top UK into recession

Pound Euro exchange rate rocked amid fears BoE will top UK into recession

The Pound Euro exchange rate traded erratically this week as Sterling sentiment was rocked by warnings that aggressive rate hikes from the Bank of England (BoE) could tip the UK into a recession. 

Pound slumps amid concerns higher rates will stifle UK growth 

The Pound Euro exchange rate initially strengthened this week, with GBP/EUR striking a fresh nine-month high. Sterling’s strength was underpinned by BoE rate hike bets, while a lull in data left the Euro without support. 

GBP/EUR then plunged around a cent in mid-week trade. The Pound coming under pressure after the UK’s consumer price index showed inflation remained stubbornly high in May. 

While the CPI figures bolstered BoE rate hike expectations, analysts warned the bank may need to tip the UK into a recession if it is to bring inflation back under control. 

At the same time, the Euro was supported by risk-off flows and its negative correlation with the US Dollar. 

Thursday then saw the BoE’s surprise markets by raising interest rates by 50bps, although the resulting upside in the Pound remained very limited in scope in light of UK growth concerns. 

The end of the week, saw the GBP/EUR exchange rate mount a convincing recovery, with the pairing clawing back the bulk of its losses following upbeat UK retail sales data and abysmal Eurozone PMIs. 

Cooling Eurozone inflation to drag on the Euro? 

Looking ahead, the most impactful data release of next week’s session is likely to be the Eurozone’s own inflation figures. 

June’s preliminary CPI release could place considerable pressure on the euro if inflation in the bloc continued to cool at a similar pace as it did in May. 

Another rapid deceleration in inflation is likely to lift pressure on the ECB to continue to raise rates. Expect to see EUR exchange rates slump if this causes bets on further hikes past July to fall off a cliff. 

In the meantime, the Euro could also face resistance if data shows economic sentiment in the Eurozone continued to deteriorate this month. 

The only notable GBP data release next week will be the UK’s latest GDP figures. But barring a revision to first quarter growth its impact on the Pound may be negligible.  

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