The Pound Euro exchange rate stumbled this week in response to dovish remarks from Bank of England (BoE) Governor Andrew Bailey.
Pound slips as UK inflation set to fall ‘markedly’
The Pound Euro exchange rate traded with modest gains at the start of this week. Sterling’s increasingly risk-sensitive nature saw it benefit from a prevailing risk-on mood, while the single currency was dented by underwhelming German trade figures.
The pairing then climbed to a two-month high on Tuesday. This was driven primarily by Euro weakness in response to weaker-than-forecast Eurozone PPI and retail sales figures.
While a startling slump in German factory orders looked to extend the upside in GBP/EUR, the Pound was dealt a heavy blow on Wednesday, as Bailey spoke before Parliament’s Treasury committee.
Bailey suggested that UK inflation will fall ‘markedly’ by the end of the year, and that the BoE is ‘nearer to the top of the [tightening] cycle’.
The second half of the week saw GBP/EUR trade in a wide range as the Euro was buffeted by lacklustre Eurozone data and the Pound fell victim to a souring market mood.
All eyes on the ECB
Centre stage next week will be the European Central Bank’s (ECB) latest interest rate decision.
There’s speculation the ECB will leave rates on hold this month, likely signalling the end of the bank’s hiking cycle. If confirmed its likely the Euro could come under heavy selling pressure.
The publication of Germany’s latest ZEW index is also likely to influence EUR exchange rates, with the single currency potentially stumbling if economic sentiment continued to deteriorate this month.
Meanwhile the primary focus for GBP investors will be the UK’s latest jobs report. If wage growth remains hot it may revive BoE rate hike bets and lift the Pound.
However, any upside in Sterling could be tempered by the publication of the UK’s GDP figures, as economists forecast growth will have slumped in July.
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