The Pound Euro (GBP/EUR) exchange rate weakened last week, following a dovish interest rate hike from the Bank of England (BoE).
What’s Been Happening: GBP Volatile as BoE Delivers Dovish Hike
At the start of the week, the Pound (GBP) was mostly stable with GBP investors holding their positions ahead of the Bank of England’s latest interest rate decision.
However, growing recession jitters tempered these gains, following the publication of the UK’s latest manufacturing PMI.
On Thursday, the BoE hiked rates by 25bps, in line with market expectations. Dovish forward guidance accompanied this, which weighed heavily on Sterling. However, BoE Governor Andrew Bailey helped to quickly reverse these losses with hawkish comments in his accompanying press conference.
Downbeat economic forecasts continued to weigh on Sterling through to the end of the week, though bullish market sentiment offer some modes support.
Meanwhile, the Euro (EUR) got off to a slow start, despite upbeat GDP growth and a resilient core inflation. The European Central Bank (ECB) was considered unlikely to continue hiking rates, denting demand for EUR.
EUR investors largely shrugged off a fall in Eurozone unemployment in mid-week trade. Before the Euro’s negative correlation with a weakening US Dollar (USD) revived the single currency at the end of the session.
Three Things to Watch Out for This Week
- UK GDP
Friday brings the latest UK GDP data, wherein a stall is forecast for the second quarter. This may weigh heavily on Sterling.
- Final German Inflation
On Tuesday, the final German inflation print for July is due. If this shows a further decrease than expected, EUR could weaken.
- Market Risk Dynamics
As a safer currency, a shift to bearish trade could strengthen the Euro. However, a shift to upbeat trade may benefit GBP.
GBP/EUR Outlook
Continued analysis of last week’s BoE rate hike may continue to shape GBP/EUR this week, amidst a lack of data. The UK’s economic outlook remains downbeat, and further news pertaining to the cost-of-living crisis may weigh on GBP.