The euro pound exchange rate witnessed notable volatility this week, hitting a one-year high before falling to a nine-day low as worrying PMI data rocked both currencies.
Pound falls on UK business activity contracts
After a choppy start to the week, the Euro finally started trending lower. Concerns about the health of the German economy dragged down the euro, along with the negative correlation of the single currency with the rise of the US dollar.
The midweek brought turbulence to the currency markets. After eurozone PMIs showed a deeper-than-expected contraction in private sector activity, the euro fell to a one-year low against sterling.
However, the PMI contained signs of persistent inflation, prompting bets for interest rate hikes from the European Central Bank (ECB). This, together with the bad mood of the market, contributed to the recovery of the euro.
Meanwhile, the pound initially rallied against the euro this week despite struggling elsewhere.
After hitting a one-year high on Wednesday morning, GBP/EUR slumped as UK PMI surveys missed forecasts. Business activity in the UK contracted unexpectedly in August, raising fears of a recession.
The PMIs also contained signs of declining inflation, dampening expectations of a Bank of England (BoE) rate hike.
New data from the Confederation of British Industry (CBI) added to sterling’s woes. Retail trade fell this month at its fastest pace in two years. The euro pound exchange rate fell to its lowest level in nine days.
At the end of the week, the British pound recovered some losses after a larger-than-expected drop in German business morale hit the euro. However, GBP/EUR remained lower overall.
Eurozone inflation in the spotlight
As for next week’s session, the latest eurozone consumer price index is the main focus of attention for euro investors.
Economists expect both headline and core inflation to cool, which could dent the ECB’s rate hike bets and thus weigh on the common currency. However, any sign that inflation remains sticky could instead boost the EUR.
Ahead of CPI, mixed German data could send the euro faltering. While German consumer confidence is expected to have improved heading into September, retail sales for July are on track to post a second straight month of decline.
As for the pound, next week’s data schedule is remarkably thin. This could leave the British pound trading without clear direction.
In the absence of market-moving data releases, sterling investors may turn to domestic headlines for fresh momentum. Any ongoing concerns about the UK cost of living crisis or speculation about a more dovish approach from the Bank of England could weigh on the pound.
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