The Pound Euro exchange rate struck a five-month high this week, following an underwhelming response to the European Central Bank’s (ECB) latest interest rate decision.
Euro slumps as ECB more cautious than expected
The Pound Euro exchange rate got off to a positive start this week. Sterling sentiment was underpinned by a risk-on market mood, while EUR investors were cautious ahead of the ECB’s rate decision.
GBP/EUR maintained a positive trajectory through the first half of the week as GBP investors welcomed a a larger-than-expected fall in UK government borrowing, which fuelled hopes for more tax cuts in Chancellor Jeremy Hunt’s Spring Budget.
The Pound then caught further bids in mid-week trade following the publication of the UK’s latest PMIs as service sector growth soared to an eight-month high. At the same time, the Eurozone’s PMIs showed the bloc’s private sector remained in contraction, dragging on the Euro.
EUR exchange rates then tumbled in the wake of the ECB’s first interest rate decision of the year.
While the bank’s decision to keep rates on hold came as little surprise, EUR investors appeared to be disappointed that President Christine Lagarde wasn’t as forceful in dispelling rate cut bets as they hoped she would be.
Confirmation of Eurozone recession to sink the Euro?
Looking ahead, the main catalyst of movement in the Pound Euro exchange rate in the first half of next week’s session will be the publication of the Eurozone’s latest GDP figures.
The preliminary estimate of growth in the last quarter of 2023 is forecast to report another 0.1% contraction in the Eurozone economy.
This would confirm the bloc slipped into a recession in the second half of last year and is likely to reflect poorly on the single currency.
However, the Euro could bounce back later in the week, with the release of the Eurozone’s consumer price index.
If January’s preliminary CPI figures report another acceleration in inflation this is likely to weaken ECB rate cut bets and lift the single currency.
Meanwhile, the Bank of England (BoE) will conclude its latest interest rate decision next week. No policy changes are expected next week, but the Pound may rally if the bank makes a concerted effort to rebuff rate cut speculation.
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