The Pound Euro exchange rate enjoyed strong support this week, with the pairing’s ascent being reinforced by a dovish interest rate hike from the European Central Bank (ECB)
Euro punished by dovish ECB rate hike
The Pound Euro exchange rate opened this week on strong footing, following the publication of the latest PMI’s from both the UK and Eurozone. While the Eurozone’s private sector suffered its worst slump since November, the UK’s narrowly avoided a contraction.
The downtrend in the Euro then persisted on Tuesday after Germany’s latest IFO business climate index reported a worrying decline in German business morale. At the same time, the Pound benefited from an improving market mood and rebound in UK business optimism.
GBP/EUR traded in narrow range in the middle of the week as markets braced for the ECB’s latest interest rate announce rate decision.
The Euro then resumed its decline in response to the ECB’s rate decision. While the ECB raised rates by 25bps as forecast, the bank’s outlook on monetary policy proved more dovish than expected.
Speaking after the decision ECB President Christine Lagarde, appeared to signal the bank has gone far enough in tightening its monetary policy.
The Euro remained on the back foot at the end of the session after Germany’s latest GDP figures printed below expectations.
BoE rate decision in focus
Turning to next week, the Bank of England’s (BoE) own rate decision on Thursday will be the central focus for investors
In the wake of the UK’s latest inflation print, the BoE is now expected to only raise rates by 25bps at its August meeting.
However, the bank’s forward guidance could still see the Pound firm, if – in contrast to the ECB and Federal Reserve – the BoE commits to raising rates again in the coming months.
In the meantime, some high impact Eurozone data could infuse some volatility into the Euro at the start of the week.
Monday will see the publication of the bloc’s latest GDP and inflation figures. A weaker-than-expected growth reading or continued cooling of inflation may further undermine ECB rate hike expectations and pull the Euro lower.
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