The Pound Euro exchange rate traded erratically over the past week following remarks from Bank of England (BoE) and European Central Bank (ECB) officials.
Pound buoyed by BoE Bailey comments
The Pound Euro exchange rate initially firmed this week. While EUR sentiment was bolstered by better-than-expected German trade figures, Sterling saw stronger support amid a bullish market mood.
The single currency was quick to bounce back as the Eurozone’s latest jobs data reported that unemployment in the bloc fell to a record low in November. As a souring market mood left the Pound unable to put up much resistance.
The middle of the week saw GBP/EUR trade in a wide range. Sterling was buoyed by comments from BoE Governor Andrew Bailey in which he reiterated the importance of returning inflation to target. At the same time that EUR exchange rates firmed on the back of a speech by ECB Vice President Luis de Guindos, in which he suggested that the pace of disinflation is likely to slow in 2024.
This volatility persisted into the second half of the week, with the GBP/EUR exchange rate initially stumbling on Thursday amid speculation that a rapid fall in inflation would encourage the BoE to cut interest rates earlier than previously expected. Before rebounding as the Euro was undermined by its negative correlation with the US Dollar.
Closing out the week was the publication of the UK’s latest GDP figures. While growth beat expectations in November, analysts suggested this would not be enough for the UK to dodge a recession, leaving the Pound muted.
Acceleration in UK inflation to lift Sterling?
Centre stage next week will be the publication of the UK’s consumer price index.
December’s CPI figures are expected to report UK inflation began to accelerate for the first time since February. This could weaken expectations the Bank of England will begin to cut interest rates in the first half of 2024 and is likely to bolster the Pound.
On the other hand, the UK’s latest jobs report could do the inverse, as an expected cooling of wage growth could boost BoE rate cut bets and sap Sterling sentiment.
Either way, the Pound is likely to find support at the end of the session if the UK’s latest retail sales figures report that consumer spending remained robust at the end of 2023.
Meanwhile, the primary focus for EUR investors next week is likely to be Germany’s latest ZEW economic sentiment index, with Tuesday’s release likely to strengthen the Euro if it reports morale continued to improve this month.
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