The Pound Euro (GBP/EUR) exchange rate was volatile last week, though it managed to gain ground overall, amid political and economic instability in both the UK and the Eurozone.
Today, GBP/EUR is heading lower. UK GDP unexpectedly contracted by 0.3% in April, fuelling fears of a looming recession.
What’s Been Happening: GBP/EUR Fluctuates in Volatile Trade
The Euro (EUR) started the week off on the defensive as Russia tensions weighed on EUR. In addition, a surprise 2.7% decline in German factory orders added to the single currency’s downside.
EUR then strengthened midweek after the latest Eurozone GDP estimate came in at 0.6% – double the previous estimate.
The European Central Bank (ECB) decision saw the Euro spike and then slump. While the ECB sounded rather hawkish, it failed to outline how it would deal with fragmentation in the Euro area. If changes to monetary policy impact Eurozone countries disproportionately, it could destabilise the bloc’s economy.
Meanwhile, the Pound (GBP) zigzagged higher early last week as Boris Johnson survived the no confidence vote.
However, warnings that the UK economy will stall next year saw GBP reverse the upside.
Sterling surged higher after the ECB decision, boosted by some cross-driven buying.
But Brexit concerns pared the Pound’s gains on Friday afternoon. Investors are anxious about the UK’s proposed plans to scrap parts of the Northern Ireland protocol.
Three Things to Watch Out for This Week
- UK Unemployment Rate
Economists expect the UK unemployment rate to have fallen from 3.7% to 3.6% in April, which may boost GBP.
- ZEW Economic Sentiment Index
Economic sentiment in Germany – Europe’s largest economy – looks set to have risen this month. If so, EUR could climb.
- BoE Interest Rate Decision
Markets see the Bank of England (BoE) hiking rates by 25 bps on Thursday. This could exacerbate recession risks, thereby hurting Sterling.
It looks like there could be more big swings over the coming week, with some high-impact events on the calendar. If the BoE strikes a downbeat tone, GBP/EUR could fall overall. Meanwhile, Brexit news may be another factor weighing on the Pound.