The pound euro exchange rate was catapulted to its highest level since April 2022 this week, following some alarming Eurozone data. 

Euro plummets on abysmal PMIs 

The pound euro exchange rate got off to a roaring start this week, as EUR investors were spooked by the Eurozone’s weaker-than-expected PMI figures. 

The euro plummeted as September’s preliminary figures reported the bloc’s private sector contracted for the first time since January, EUR investors were particularly concerned by the sharp decline in Germany’s manufacturing sector, as this stoked fears the Eurozone’s largest economy is currently in a recession. 

While the UK’s PMIs also printed below forecast, Sterling drew support from signs of underlying strength in the service sector. 

The pound then consolidated these gains on the back of comments by Bank of England (BoE) Governor Andrew Bailey in which he suggested that UK interest rates will fall ‘gradually’. 

GBP/EUR began to weaken as we headed into the middle of the week as a souring market mood took its toll on the increasingly risk-sensitive pound, while buoying the appeal of the safe-haven euro. 

However, the pairing was quick to bounce back as market sentiment improved again in the second half of the week. 

The euro then faced additional pressure at the very end of the week amid a ramping up of European Central Bank (ECB) interest rate cut bets. 

Euro to extend losses as inflation cools? 

Turning to next week, it’s likely that the Eurozone’s latest consumer price index will act as the main catalyst of movement for the pound euro exchange rate. 

September’s preliminary CPI figures are forecast to report a further cooling of inflation, with some economists even predicting it will fall below the ECB’s 2% target. 

Another slowdown in inflation is likely to reinforce expectations the ECB will cut interest rate again in October and may apply some notable pressure to the euro in the first half of the week. 

Any downside in the euro may also be extended if September’s finalised PMI figures confirm the sharp slowdown in Eurozone private sector growth. 

Meanwhile, UK economic data is in short supply next week. This may leave movement in the pound to be dictated by market risk dynamics. Will a cautious mood see Sterling relinquish some of its recent gains? 

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