The Pound Euro (GBP/EUR) exchange rate tumbled to a five-month low last week as markets repriced their expectations for Bank of England (BoE) and European Central Bank (ECB) interest rate rises.
What’s Been Happening: GBP/EUR Plunges to Five-Month Low following BoE Decision
The Euro (EUR) managed to strengthen against the Pound (GBP) through the first part of last week, despite some poor Eurozone data. The upside came courtesy of EUR’s negative correlation to a weakening US Dollar (USD).
Meanwhile, the Pound came under pressure amid a risk-off market mood and new UK sanctions banning services exports to Russia.
Thursday’s BoE meeting was the main event, however. Despite hiking rates, the UK central bank presented a gloomy outlook for the UK economy, causing markets to scale back their future rate rise expectations. GBP exchange rates plummeted across the board.
Following the BoE rate rise (and the Federal Reserve hike earlier in the week), markets increased their bets for an ECB rate hike, further boosting the single currency against Sterling.
GBP/EUR ended the week still trading at a five-month low.
Three Things to Watch Out for This Week
- German ZEW Economic Sentiment Index
Economists expect German economic sentiment to slip lower once again this month, which could hurt the Euro.
- Central Bank Speakers
Some ECB and BoE policymakers are due to speak this week, most notably ECB President Christine Lagarde. Any hints at future ECB policy could impact EUR exchange rates.
- UK GDP
Following the BoE’s bleak economic forecast, Sterling could be particularly sensitive to the latest UK GDP results. Any signs that the economy is slowing down may damage the Pound.
While both currencies may face some headwinds this week, the single currency could retain the upper hand. Any recovery in the Pound may be severely limited as the ramifications of the BoE meeting will likely continue to apply pressure.