The Pound Euro exchange rate fluctuated this week, briefly striking a new three-month high, before swiftly retreating amid some mixed UK data.
Pound rocked by uneven data
The Pound Euro exchange rate got off to a mixed start this week. While EUR sentiment was undermined by data showing that Germany’s economy contracted in 2023, Sterling struggled to attract support amid a souring market mood.
GBP/EUR continued to stumble through the first half of the week after the UK reported a sharp deceleration in wage growth in November. While Germany’s latest economic sentiment index unexpectedly rose to an 11-month high.
Sterling then mounted a convincing recovery in the middle of the week, following the publication of the UK’s consumer price index. December’s CPI figures reported a surprise uptick in inflation, which weakened expectations for a series of aggressive interest rate cuts from the Bank of England (BoE) this year.
Meanwhile, the Euro was undermined by its negative correlation with the US Dollar, although some hawkish comments from European Central Bank (ECB) President Christine Lagarde helped to temper these losses.
However, the Pound came crashing back to earth at the end of the week, following the publication of the UK’s latest retail sales figures. December’s figures reported a whopping 3.2% contraction in sales growth and stoked fears the UK may have slipped into a recession at the end of 2023.
ECB interest rate decision in the spotlight next week
Looking ahead, it’s safe to assume that the ECB’s latest interest rate decision will act as the main catalyst of movement in the GBP/EUR exchange rate next week.
The ECB is widely expected to leave interest rates on hold again this month, leaving the focus on the bank’s forward guidance.
If the ECB continues to push back against interest rate cut speculation, the Euro is likely to strengthen.
Ahead of the ECB’s rate decision EUR exchange rates may be influenced by the Eurozone’s latest PMI figures. Expect to see the Euro face resistance on Wednesday k if private sector activity in the Eurozone continued to contract this month.
The UK will also publish its own PMIs this week. January’s preliminary figures could provide a strong boost for the Pound if they report that activity in the UK’s vital services sector continues to accelerate.
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