The pound-euro exchange rate traded in a wide range this week as both the Bank of England (BoE) and the European Central Bank (ECB) issued their final decisions on 2023 interest rates.
The pound, boosted by the BoE’s hawkish tone
The pound-euro exchange rate briefly hit a three-month high earlier this week, before almost immediately giving back these gains.
This GBP/EUR slide began on Tuesday with the release of a mixed UK employment report. While unemployment remained unexpectedly stable at 4.2%, wage growth cooled more than expected. Meanwhile, a bigger-than-expected improvement in German economic sentiment helped the euro take advantage of the pound’s decline.
The sell-off in sterling was reinforced mid-week with the release of the latest UK GDP figures. A surprise contraction in growth in October stoked recession fears and weakened expectations ahead of the Bank of England’s interest rate decision.
In the second half of the week, the pound recovered some of its losses, following the Bank of England’s interest rate decision. While the Bank of England left rates unchanged as expected, it made a concerted effort to counter speculation about rate cuts.
However, the GBP/EUR’s rise remained limited as the euro was simultaneously boosted by ECB President Christine Lagarde said the bank did not discuss rate cuts at this month’s policy meeting.
At the end of the week, the euro was weakened by weaker than expected Eurozone PMI data. While a stronger than expected expansion in the services PMI strengthened the pound.
Will Cooling UK Inflation Hit Sterling?
Looking ahead to the last full week of trading in 2023, the main catalyst for the movement of the Pound Euro exchange rate will likely be the release of the UK Consumer Price Index.
CPI figures are expected to show that UK inflation continued to slow into November. Despite the Bank of England’s hawkish guidance, this could still stoke expectations of rate cuts and weaken sterling sentiment on Wednesday.
The release of the latest UK retail sales figures will also potentially influence sterling exchange rates. Could a rebound in sales growth last month help the pound close the week on a positive note?
Meanwhile, the eurozone’s own CPI figures are expected to confirm a sharp cooling of inflation in the bloc in November, which could weigh on the euro in the absence of other notable euro data.
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