Pound Euro (GBP/EUR) Weekly Forecast: Volatility Ahead?

The Pound Euro exchange rate (GBP/EUR) traded in a wide range last week, hitting a fresh 23-month high before relinquishing all of its gains.

This morning, GBP/EUR has slipped. The UK’s flash PMIs for January missed forecasts, while strong expansion in Germany’s manufacturing sector boosted the single currency.

What’s Been Happening: GBP/EUR Sheds Gains on Retail Sales Slump

The Euro (EUR) initially gained some ground against the Pound (GBP) last week. This was in part due to a better-than-expected ZEW economic sentiment score from Germany.

However, central bank policy divergence eventually pressured EUR to the downside. While markets expect the Federal Reserve and Bank of England (BoE) to tighten policy throughout 2022, the European Central Bank (ECB) maintains its dovish stance.

The single currency then regained its losses on Friday as a risk-off mood helped the safe-haven Euro recover against a weakening Pound.

Meanwhile, Sterling edged lower early last week as uncertainty around Boris Johnson’s future as Prime Minister prompted caution among GBP investors.

The Pound Euro exchange rate then held strong through most of the week. Upbeat jobs data and a higher-than-forecast inflation rate increased the likelihood of a BoE rate hike on 3 February.

Sterling couldn’t hold its gains, however, as UK retail sales slumped by 3.7% in December. This was far worse than the 0.6% contraction economists had expected.

Three Things to Watch Out for This Week

  1. UK Politics

With market-moving UK data thin on the ground this week, the country’s current political turmoil could drive GBP movement – particularly the findings of Sue Gray’s parties inquiry.

  1. Federal Reserve Interest Rate Decision

The Fed decision could affect GBP/EUR through its impact on risk appetite and through movements in the US Dollar (USD), due to EUR and USD’s negative correlation.

  1. Germany GDP Growth Rate

Markets expect Europe’s largest economy to have contracted by 0.2% in the fourth quarter of 2021, which could dent EUR.

GBP/EUR Forecast

Another week of volatility could be in store. UK political news and the Fed’s rate decision could impact markets in unexpected ways, while economic data releases and uncertainty around the Russia-Ukraine conflict add to the uncertainty.

Samuel Birnie

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