The Pound Euro (GBP/EUR) exchange rate surged to a four-week high last week, as investors grew hopeful that the UK’s recession would be shorter and shallower than initially feared.
So far this week, the Pound Euro pair has dropped sharply. Anti-lockdown protests in China have sparked widespread risk aversion, which in turn is weighing on the riskier Pound (GBP) over the safer Euro (EUR).
What’s Been Happening: GBP/EUR Hits 24-Day High amid Optimistic Trade
The Euro wobbled against the Pound early last week. Fears that Russia’s Gazprom would cut gas supplies via Ukraine worried EUR investors, but a stronger-than-expected recovery in Eurozone consumer confidence lifted the single currency.
However, midweek Sterling surged higher against the single currency. Prospects that the Federal Reserve would ease its pace of monetary policy tightening cheered markets, thereby boosting the more risk-sensitive Pound over the safe-haven Euro.
In addition, better-than-forecast UK PMIs raised hopes that the UK’s economic downturn may not be as bad as initially feared.
The latest European Central Bank (ECB) meeting minutes added to the Euro’s downside. Policymakers expressed concerns about a potential Eurozone recession, which may mean the ECB softens its stance on interest rate hikes.
After hitting a 24-day high on Thursday, GBP/EUR retreated slightly at the end of the week. However, it held on to most of its gains.
Three Things to Watch Out for This Week
- Eurozone Inflation Rate
Economists expect Eurozone inflation to have eased in November. If it unexpectedly edges up, the Euro could firm on ECB rate rise bets.
- Eurozone Economic Sentiment
A forecast improvement in the bloc’s economic sentiment index could boost the common currency.
- Central Bank Speeches
This week brings speeches from policymakers at both the ECB and the Bank of England (BoE). EUR and GBP traders will be listening closely for any hints about future approaches to monetary policy.
UK data is rather sparse this week, so Sterling may trade according to its increasingly risk-sensitive nature. Overall, GBP/EUR could relinquish some gains if Eurozone data brings positive news and ECB policymakers hint at further interest rate rises.