The Pound Euro (GBP/EUR) exchange rate strengthened last week, as central bank policy divergence once again boosted Sterling against the single currency.
What’s Been Happening: GBP/EUR Gains on BoE-ECB Policy Divergence
Dovish comments from European Central Bank (ECB) President Christine Lagarde weighed on the Euro (EUR) early in the week. Lagarde seemed to push back on rate hike bets, saying she expects inflation to stabilise.
The single currency then wavered following mixed German trade data. Although the country’s trade surplus narrowed, both imports and exports unexpectedly increased.
But more remarks from Lagarde hit the Euro on Friday. In an interview, Lagarde warned that hasty rate hikes could stifle the Eurozone’s economic recovery.
Meanwhile, the Pound (GBP) wavered higher at the beginning of the week. The cost-of-living crisis dampened Sterling sentiment, but better-than-expected sales data gave the currency a boost.
Wednesday threw a handful of headwinds at GBP, causing it to slip. A downbeat Brexit report and cost-of-living concerns weighed on Sterling, while Bank of England (BoE) Chief Economist Huw Pill cautioned against ‘aggressive’ rate hikes.
However, GBP/EUR strengthened at the week’s end, hitting an eight-day high. BoE rate hike bets picked back up and the UK’s latest GDP data was fairly upbeat.
Three Things to Watch Out for This Week
- ECB Speeches
A number of ECB officials are due to speak this week. With the central bank seemingly on the cusp of a shift in approach, investors will be combing policymakers’ comments for clues.
- UK Jobs Data
Economists expect the latest batch of UK employment reports to show a modest improvement. Any surprises could cause significant movement in GBP.
- UK Inflation
Consensus estimates see UK inflation holding at 5.4% in January. If inflation doesn’t rise, Sterling could slip, as this relieves pressure on the BoE to aggressively raise rates.
GBP/EUR Forecast
While these are the key events to watch, there are many other potentially high-impact data releases this week. Meanwhile, the Russia-Ukraine crisis brings additional uncertainty. GBP/EUR could experience some volatility as a result.