The Pound Euro exchange rate rebounded from its initial losses this week, following a dovish interest rate hike from the European Central Bank (ECB).
Euro slumps as ECB signals interest rates have peaked
The Pound Euro exchange rate opened this week on the front foot. Sterling was bolstered by a prevailing risk-on mood, while EUR sentiment was undermined by after the European Commission cut its Eurozone growth forecasts for this year.
But the pound was quick to relinquish these gains. The downturn in GBP exchange rates began with the publication of a mixed UK jobs report.
The selloff then gathered pace in the middle of the week, with GBP/EUR sliding to a one-month low after the UK’s latest GDP figures reported a much larger-than-expected slump in UK economic growth in July.
Meanwhile, the Euro’s gains were capped against the Pound at this time as EUR investors were reluctant to reposition ahead of the ECB’s latest interest rate decision.
The second half of the week, then saw the GBP/EUR exchange rate rebound from its worst levels in the wake of the ECB’s rate decision.
While the raised interest rates by 25bps to a record high of 4.5%, the bank also signalled this likely marks the peak of its tightening measures, which triggered a sharp plunge in the Euro.
BoE in focus next week
It will be the Bank of England’s (BoE) turn in the spotlight next week as it is set to conclude its September policy meeting on Thursday.
The BoE is widely expected to also raise interest rates by 25bps, hiking borrowing costs to 5.5% in the process.
The general consensus is that this will also mark the end of the BoE’s own hiking cycle. Confirmation of which could see the Pound come under similar pressure to the Euro this week.
However, these expectations could be upended ahead of the BoE’s decision with the publication of the UK’s consumer price index on Wednesday. A stronger-than-expected inflation reading might bolster expectations for further hikes and lift the Pound.
The end of the week will also see the publication of the UK’s latest PMI readings, which could pressure Sterling if private sector growth continued to contract this month
The Eurozone’s own PMIs will be the highlight for EUR investors next week. September’s preliminary figures are expected to report a deepening contraction in bloc’s manufacturing and service sectors which could pile more pressure on the Euro.
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