Pound Euro Weekly Forecast: GBP/EUR Exchange Rate Driven by UK Inflation?

The Pound Euro (GBP/EUR) exchange rate experienced some volatility last week amid a shifting market mood and political jitters about Boris Johnson’s premiership.

What’s Been Happening: GBP/EUR Fluctuates during Volatile Week

The Euro (EUR) firmed early last week amid a drop in Eurozone unemployment, a weaker US Dollar (USD) and a risk-off market mood.

The single currency then wavered through much of the week. A retreating US Dollar buoyed EUR while a dovish European Central Bank (ECB) and an improving market mood offset the upside.

Finally, EUR lost ground to GBP by the end of the week. The Eurozone reported its first trade deficit since January 2014, while German GDP data confirmed that Europe’s largest economy remains below pre-pandemic levels.

Meanwhile, the Pound (GBP) spiked on Tuesday amid strong sales data and Bank of England (BoE) rate hike expectations. However, profit-taking saw Sterling shed these gains.

More volatility came as MPs called for Boris Johnson’s resignation for allegedly breaking lockdown rules and misleading parliament. The political uncertainty was bad for Sterling, although Omicron optimism prevented losses.

Sterling then gained on Friday thanks to strong UK GDP data. November’s GDP growth printed at 0.9%, beating forecasts of 0.4%. This put the UK economy above pre-pandemic levels – a significant milestone in the country’s recovery.

Three Things to Watch Out for This Week

  1. Germany’s ZEW Economic Sentiment Index

Economists expect morale to have edged up this month, although the forecast figure may not be enough to boost EUR.

  1. UK Inflation

If UK inflation rises by more than expected then GBP could strengthen, as it would increase the likelihood of a BoE rate rise next month.

  1. UK Retail Sales

The consensus estimate sees retail sales declining by 0.6% in December. Any surprise results could cause some movement in the Pound.

GBP/EUR Forecast

UK inflation is the key release this week, and could be the defining factor in GBP/EUR. Will a hotter reading see Sterling soar?

Samuel Birnie

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