The euro pound exchange rate experienced continued volatility this week, falling to a two-week low before recovering to end the week higher.
Pound Rallies as Markets Reduce Bets on ECB Rate Hike
The pound was weak at the start of the week, trading in a tight range as the UK bank holiday on Monday limited the pound’s movement.
The British pound then fell on Tuesday as a lack of economic data left it vulnerable to losses.
Meanwhile, the euro shrugged off an unexpected drop in German consumer confidence on Tuesday to rise against the pound. A sharp fall in the US dollar boosted the single currency, due to the strong negative correlation of the euro with the dollar.
After hitting a two-week low against the euro, the British pound began to rally in the middle of the week. Improved market sentiment helped the increasingly risk-sensitive pound, as did the Bank of England’s (BoE’s) ongoing rate hike bets.
The euro came under pressure as the dollar strengthened, while a reversal in bets from the European Central Bank (ECB) added to the euro’s woes.
Isabel Schnabel, the ECB’s head of policy – considered one of the toughest authorities on the Governing Council – was evasive when speaking of further rate hikes.
Furthermore, although the eurozone headline inflation rate was higher than forecast, the minutes of the July ECB meeting showed concern about the health of the eurozone economy.
Risk appetite kept GBP/EUR afloat on Friday, with the currency pair currently trading around 0.3% higher for the week.
Bad data from the eurozone to see the fall of the euro?
Next week, the recent lack of data from the UK will continue, which could limit the pound’s moves.
The only release of note will be Tuesday’s final services PMI. Preliminary results showed a surprising contraction in UK service sector activity. Could an upward revision send the British pound higher? Or will confirmation of a slowdown put pressure on the pound?
Meanwhile, the euro could face selling pressure if the next eurozone data is as expected.
Economists forecast a 4.5% contraction in German factory orders and a 0.4% drop in industrial production in July.
Eurozone retail sales are also expected to have declined in the same month, forecast to fall by 0.3%. If these data are released as expected, growing concerns about the health of the bloc’s economy could lead to a fall in the euro.
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