The Pound Euro (GBP/EUR) exchange rate was licking its wounds on Tuesday, attempting to stage a recovery from a 17-month low.
What’s Been Happening: GBP/EUR Slides to 17-Month Low Hawkish ECB and UK Sales Slump
The Pound (GBP) gained on the Euro (EUR) through the first half of last week, as UK economic data supported Bank of England (BoE) interest rate rise bets. The country’s latest employment report showed stronger-then-forecast wage growth, while August’s CPI revealed that inflation was becoming more broad-based.
Meanwhile, EUR investors celebrated Ukraine’s recent military victories, but the optimism was undermined by worries about a coming recession in Germany.
GBP/EUR then began its decline on Thursday. Thin trading conditions in the UK left Sterling vulnerable to losses while hawkish comments from European Central Bank (ECB) Vice President Luis de Guindos boosted the single currency.
On Friday, the Eurozone’s final inflation rate confirmed another record-high reading in August. This reinforced ECB rate hike expectations, thereby boosting EUR.
At the same time, the latest UK retail sales figures revealed a 1.6% contraction last month – much worse than the forecast fall of 0.5%. With some economists arguing that the UK economy is already in recession, GBP/EUR fell to a 17-month low.
Three Things to Watch Out for This Week
- BoE Interest Rate Decision
Markets expect the BoE to raise interest rates by 75 basis points, which could boost Sterling. However, recession warnings and a downbeat tone could cap any upside.
- Flash PMIs
Forecasts suggest the UK’s flash PMIs will be marginally stronger than the Eurozone’s, although overall private sector activity is expected to have contracted in both economies.
- UK Emergency Mini-Budget
UK Chancellor Kwasi Kwarteng will deliver his emergency mini-budget on Friday, providing long-awaited details on the government’s plans to tackle the cost-of-living crisis.
The Pound Euro pair may have a chance to stage a convincing recovery this week. If the BoE hikes by 0.75% and improves its forecasts in the wake of Truss’s energy spending package announcement, and if the mini-budget satisfies markets, Sterling could strengthen.