The Pound Euro (GBP/EUR) exchange rate rallied last week, as a dovish hike from the European Central Bank (ECB) diminished EUR.
What’s Been Happening: EUR Slides amid Dovish ECB Hike
The Euro (EUR) weakened on Monday, amid sharp falls in both the manufacturing and service sector indexes.
Downbeat economic data repeatedly dogged the common currency over the week’s session. A sharper-than-expected fall in German business morale was a particular thorn, weighing heavily on EUR.
The weakness was then heightened as the ECB delivered their 25bps hike, as expected. ECB President Christine Lagarde took a more cautious approach to further hikes, leading to perceptions of a dovish shift.
Investors began to consider the ECB as approaching the end of their current cycle, bringing further selling pressure to EUR.
However, EUR was able to recover some losses on Friday, strengthening as the US Dollar (USD) succumbed to profit-taking. Though, these gains were likely limited by a stalling of German GDP in the second quarter, which missed forecasts of 0.1% expansion.
The Pound (GBP) saw similar weakness on Monday, as both services and manufacturing indexes suggested an economy slowing rapidly.
Yet, the Bank of England (BoE) are likely to keep hiking, with inflation remaining a sorer spot in the UK than elsewhere. The growing divergence between the major central banks brought support to Sterling, adding to gains granted by bullish trade.
Three Things to Watch Out for This Week
- BoE Interest Rate Decision
On Thursday, the BoE are likely to hike rates by 25bps. If they strike a hawkish tone, GBP could strengthen.
- German Factory Orders
Economists anticipate that in June, German factory orders declined by 1.5%, which could weaken EUR when it prints on Friday.
- Eurozone GDP
This morning, data showed Eurozone GDP expanded by a stronger-than-expected 0.3% in the second quarter. Could this upbeat reading bring support to EUR?
GBP/EUR Outlook
Elsewhere the Euro’s negative correlation with the US Dollar may continue to influence the single currency. Could a weaker USD pressure GBP/EUR?