The Pound Euro (GBP/EUR) exchange rate plunged to a four-month low last week as markets repriced their expectations for future interest rate rises from the European and UK central banks.
What’s Been Happening: Central Bank Decisions Hammer GBP/EUR
The Pound (GBP) faced headwinds early last week as UK economic woes continued to pile up. The International Monetary Fund (IMF) predicted a UK recession this year, while company insolvencies rose and strike action intensified.
The Bank of England (BoE) interest rate decision added to GBP’s woes. Although the BoE raised rates by 50bps, it signalled that it may soon pause its tightening cycle.
This pressure continued through to the end of the week, with the BoE’s Chief Economist Huw Pill saying that the bank is wary of raising rates too high.
Meanwhile, the Euro (EUR) marched higher through the start of the week, thanks to stronger-than-forecast economic sentiment and GDP from the Eurozone.
The common currency then shrugged off a large cooldown in the Eurozone CPI. Core inflation unexpectedly remained steady, suggesting price pressures are sticky and thereby prompting European Central Bank (ECB) rate rise bets.
The ECB decision itself caused volatility amid profit-taking and policy uncertainty. Still, the ECB’s comparatively hawkish stance versus the BoE saw GBP/EUR fall to a four-month low.
Three Things to Watch Out for This Week
- UK GDP
Investors will be watching the UK GDP print to see whether or not the UK slipped into a recession at the end of 2022. A downbeat reading could hammer the Pound at the end of the week.
- German Industrial Production
A forecast contraction in German industrial production may weigh on EUR, as traders remain concerned about the health of the Eurozone’s largest economy.
- Risk appetite
Amid a lack of further high-impact data releases, global market mood could impact the riskier Pound and safer Euro.
GBP/EUR Forecast
After last week’s painful session for the Pound, this week has the potential to be another bruiser. If the market mood remains sour and UK GDP disappoints, Sterling could drop to fresh multi-month lows.