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Pound Euro exchange rate undermined by UK economic uncertainty last week

The Pound Euro exchange rate traded in a wide range last week as Sterling sentiment fluctuated in the face of growing UK economic uncertainty. 

Pound slides amid UK growth warning 

The Pound Euro exchange rate initially firmed at the start of the week. The Euro got off to a poor start after Germany reported a larger-than-expected contraction in industrial production in June. While Sterling was bolstered by an improving market mood. 

The Euro remained on the defensive on Tuesday as it was pressured by the single currency’s negative correlation with the US Dollar, alongside confirmation German inflation cooled in July. 

GBP/EUR then fell sharply in mid-week trade. This was primarily driven by gloomy forecasts from the National Institute of Economic and Social Research (NIESR), in which it warned the UK faces ‘five years of lost growth’.  

At the same time, the Euro received a boost after Italy walked back its plans to introduce a windfall tax on its banks. 

As we entered the second half of the week, the Euro’s relationship with the US Dollar proved to be a boon for the single currency, propelling it higher against an anaemic Pound and driving GBP/EUR to a three-week low. 

However, Sterling was able to claw back some of these losses at the end of the week after the UK’s latest GDP figures reported the UK economy continued to expand in the second quarter, beating forecasts it would stall and bolstering Bank of England (BoE) rate hike bets. 

Slowing UK inflation to weaken Sterling? 

Centre stage next week will be the publication of the UK’s consumer price index. 

July’s CPI figures are expected to report another cooling of UK inflation. If inflation continued to decelerate at a faster-than-expected pace last month it may further undermine Bank of England (BoE) rate hike expectations and pull the Pound lower. 

On the other hand, the UK’s latest jobs report could do the inverse, with another strong wage growth reading potentially buoying BoE rate bets and Sterling sentiment earlier in the week. 

Either way, the Pound is likely to face headwinds at the end of the session if the UK’s latest retail sales figures report that consumer spending fell in July due to the UK’s terrible weather. 

Meanwhile, the primary focus for EUR investors this week is likely to be Germany’s latest ZEW economic sentiment index, with Tuesday’s release likely to drag on the Euro if it reports morale continued to deteriorate this month. 

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