The Pound Euro (GBP/EUR) exchange rate hit a two-month high last week but is retreating during this week’s trade. Concerns about the UK’s looming recession are pressuring the Pound (GBP), while hotter-than-forecast Eurozone inflation is boosting the Euro (EUR).
What’s Been Happening: GBP/EUR Hits Two-Month High on UK Optimism
The Euro initially ticked higher last week as markets increased their bets for a 75bps interest rate hike at the upcoming European Central Bank (ECB) decision.
However, a lack of support throughout the rest of the week left EUR to slip against the strengthening Pound.
On Thursday, the ECB decision saw the single currency slump. Although the bank raised rates by 75bps, its accompanying commentary sounded rather dovish. On Friday, more cautious comments from ECB officials extended EUR’s downside.
Meanwhile, Sterling stumbled early in the week after the UK’s latest PMIs indicated that the country is already in a recession.
GBP then rallied through the remainder of the week as Rishi Sunak’s appointment as Prime Minister reassured UK markets.
Investors are hopeful that Sunak’s experience and fiscal prudence will put government spending on a sustainable footing. This optimism sent GBP/EUR to a two-month high.
Three Things to Watch Out for This Week
- BoE Decision
Markets were pricing in a 75bps move from the Bank of England (BoE). However, recent political events have cast some doubt on the decision. Could a smaller rate rise see Sterling slip?
- ECB Lagarde Speech
Following the Eurozone’s hotter-than-expected CPI on Monday, markets are watching the ECB closely to try and gauge future policy decisions. If Lagarde gives a hawkish response, EUR could climb.
- Eurozone Unemployment Rate
Economists expect Euro area unemployment to hold at a record low for the third consecutive month, which could provide the single currency with some support.
GBP/EUR Forecast
The BoE decision will likely be the biggest driver of GBP/EUR movement this week. A 75bps hike could support Sterling, while a smaller move could dent the UK currency. Either way, we could be in for some big swings and unpredictable movement.