Despite initially stumbling, the Pound Euro (GBP/EUR) exchange rate rose last week, stopping just shy of a 23-month high. The upside came as central bank policy divergence weighed on the Euro (EUR) and supported the Pound (GBP).
What’s Been Happening: GBP/EUR Advances on Central Bank Policy Divergence
The Euro started the week strong, with Germany’s services and manufacturing PMIs unexpectedly improving. A risk-off market mood also supported the safe-haven currency.
However, a strengthening US Dollar (USD) before and following the Federal Reserve’s hawkish policy announcement applied pressure on EUR throughout the week.
The Euro then wavered on Friday following mixed GDP data. While Germany saw a larger-than-expected contraction in GDP, Spain and France experienced better-than-forecast growth.
Meanwhile, the Pound stumbled early on as private-sector growth in the UK unexpectedly slowed to an 11-month low.
Political uncertainty over the Sue Gray report hounded Sterling for much of the week. However, with the Bank of England (BoE) likely to raise rates this week and the European Central Bank (ECB) remaining dovish, policy divergence supported GBP/EUR.
Sterling then fluctuated in a narrow range on Friday but held on to its weekly gains.
Three Things to Watch Out for This Week
- Sue Gray Report
The delayed findings of the ‘partygate’ inquiry could be politically fatal for Boris Johnson, unless the Met has taken the teeth out of the report. When it is released it could cause significant movement in Sterling.
- Eurozone Inflation
Eurozone inflation is expected to have eased ahead of the ECB’s policy decision. If it does, EUR may drop.
- Central Bank Decisions
Both the BoE and the ECB meet on Thursday to decide on monetary policy. Following the decisions, we could see some sharp movement in the Pound Euro pair.
GBP/EUR Forecast
The central bank decisions take centre stage this week. Economists expect the BoE to hike its Bank Rate up to 0.5%, while the ECB is likely to maintain its loose policy approach. As a result, we could see GBP/EUR hit new highs.