The Pound Euro (GBP/EUR) exchange rate tumbled from a two-year high to a six-week low last week, after the European Central Bank (ECB) hinted at a more hawkish approach to monetary policy.
What’s Been Happening: GBP/EUR Sheds Gains on ECB Expectations
The Euro (EUR) initially firmed against the Pound (GBP) last week as a softer US Dollar (USD) lent support to the single currency thanks to the negative correlation between EUR and USD.
EUR then wavered ahead of the ECB and Bank of England (BoE) meetings, with an unexpected rise in Eurozone inflation supporting the Euro.
Following the interest rate decisions, ECB President Christine Lagarde did not rule out a 2022 rate hike, as she has done before. EUR investors took this as a hint that the central bank may take a more hawkish approach in upcoming decisions, which sent the Euro soaring.
Meanwhile, the Pound initially slipped as Boris Johnson wrangled with Sue Gray’s ‘partygate’ report.
Sterling surged higher following the BoE decision. While the 25-basis-point rate hike was expected, markets were surprised that four of the nine policymakers wanted a steeper rise of 50 basis points.
However, following the ECB decision, and amid concerns over the UK’s cost-of-living crisis, GBP/EUR slumped to a six-week low.
Three Things to Watch Out for This Week
- ECB Lagarde Speech
Lagarde is due to speak on Monday afternoon. If she tries quash rate-hike rumours, EUR will likely fall. But if she leaves the door open to a 2022 rate rise, the Euro could catch some bids.
- UK Politics
This is a critical week for the embattled Prime Minister Boris Johnson. Reports suggest that Tory rebels are only a few letters away from triggering a motion of no confidence. Could a vote be called this week?
- UK GDP
Economists expect UK GDP to have contracted by 0.5% month on month in December. Such a result would likely dent Sterling.
GBP/EUR Forecast
With so many unknowns, this week could bring more volatility. If Johnson does face a vote of no confidence then EUR may come out on top.