The Pound Euro (GBP/EUR) exchange rate headed lower on Monday morning following underwhelming UK GDP figures, although it has recouped Friday night’s losses.
What’s Been Happening: GBP/EUR Volatile amid ECB Decision and UK Spending Plan
The Euro (EUR) softened through the first part of last week as Russia’s halting of gas supplies via the Nord Stream pipeline stoked fears of an impending energy crisis.
Meanwhile, the Pound (GBP) strengthened as the end of the Conservative leadership contest ended months of political instability.
Mid-week, however, EUR rallied. The third estimate for Eurozone GDP growth exceeded previous readings, cheering EUR investors. This prompted bets for a 75-bp interest rate rise from the European Central Bank (ECB), pushing GBP/EUR to a 16-month low.
However, the ECB accompanied its jumbo rate hike with a stark warning about a possible recession, causing some fluctuations in the Euro.
At the same time, Liz Truss announced her energy support package, boosting the Pound. But worries about the cost of the intervention severely capped GBP’s upside.
The Pound Euro pair wavered through the latter part of the week before unexpectedly diving to a 19-month low on Friday night. It has since recovered.
Three Things to Watch Out for This Week
- UK Inflation Rate
The consensus forecast sees UK inflation edging up from 10.1% to 10.2% in August. A hotter reading could boost Bank of England (BoE) rate rise bets, thereby supporting the Pound.
- UK Jobs Data
The latest labour market report could also strengthen Sterling. Economists expect elevated wage growth and low unemployment, which could also prompt more hawkish action from the BoE.
- German ZEW Economic Sentiment
Economic sentiment in Germany looks set to hit a fresh 14-year low, which would likely weigh on EUR.
Sterling has the chance to regain ground this week, with strong employment and inflation data potentially cementing a 75-bp rate hike at the BoE meeting next week. However, an expected slump in retail sales on Friday could trim the Pound’s gains against the Euro.