Pound Euro (GBP/EUR) Exchange Rate Firms on BoE Rate Hike Bets
The Pound Euro (GBP/EUR) exchange rate trended broadly higher last week on bullish Pound (GBP) sentiment; Euro (EUR) gains were capped by slowing inflation across the bloc. The single currency failed to benefit from US Dollar (USD) weakness, despite the strong negative correlation between EUR and the ‘Greenback’.
At the time of writing, GBP/EUR is trading at €1.1621, having risen by approximately 0.9% over the past 7 days.
Pound (GBP) Climbs on Bullish BoE Expectations
The Pound traded in a limited range on Monday, as UK markets remained closed for the bank holiday. Nevertheless, an optimistic market mood served to cap GBP losses.
Into Tuesday, Sterling climbed despite a lack of UK data: economists reinforced bullish rate hike bets for the Bank of England (BoE), estimating hikes of 25 basis points at the June and August meetings.
Analysts at Goldman Sachs told reporters:
‘Our analysis reinforces our view that resilient growth, a tight labour market, and persistent inflationary pressures will convince the MPC to deliver significant additional tightening.’
The Pound plateaued temporarily on Wednesday morning, amid concerns the currency was overbought. Subsequently, however, GBP/EUR ticked up as BoE tailwinds prevailed.
Overnight, the Pound flatlined once more. A handful of GBP buyers switched to support the US Dollar, following legislation which supported the suspension of the debt ceiling.
Sterling regained support initially on Thursday amid risk-on trading sentiment, but in the second half of the session dropped once again. The fall was widely considered to be a correction following recent highs in GBP exchange rates.
GBP/EUR continued to weaken on Friday amid a lack of significant data. A fresh wave of risk aversion likely applied additional pressure upon the Pound.
Euro (EUR) Weakened by Falling Inflation
The Euro softened on Monday, as headwinds lingered following cautious rhetoric from the European Central Bank (ECB) the previous week.
Into Tuesday, the Eurozone’s latest economic sentiment index fell more than forecast, to 96.5 from 99 in April. This pointed to a weakening economic recovery in the bloc, capping EUR gains – although hawkish ECB comments helped avert significant losses.
Midweek, ECB rate rise bets were dialled back as cooler-than-forecast inflation data from France and Germany dented suggested monetary policy tightening may not be necessary. The Euro weakened against the Pound, though recouped some of its losses in the afternoon following comments from ECB policymaker Madis Muller.
Muller suggested that core inflation remained an issue, suggesting ‘It is very likely that the ECB will hike by 25 bps more than once.’
On Thursday, the Eurozone’s consumer price index also came in below expectations, renewing EUR headwinds. Nevertheless, hawkish comments from ECB President Christine Lagarde limited the downside, along with strong employment data.
At the end of the week, the Euro benefitted from its negative correlation to a weakening US Dollar. Despite a lack of data, EUR managed firm against the Pound – although it fell in several other exchange rates.
GBP/USD Exchange Rate: Data from the Bloc Set to Impress
The Euro may recoup some of its losses into this week, with growth expected across German factory orders, Eurozone retail sales and German industrial production. If the data prints as expected, tailwinds may ensue.
Meanwhile, UK data is thin on the ground. The British retail sales monitor is forecast to reveal an increase in sales on a year-to-year basis, potentially buoying GBP; a lack of additional data could cap gains, however.
Other factors which may affect GBP/EUR include geopolitical dynamics as well as risk sentiment and the ongoing war in Ukraine. Significant changes in any of these areas may alter the trajectory of the Pound Euro exchange rate.