The pound-euro exchange rate recovered from its initial losses this week, following a moderate increase in interest rates by the European Central Bank (ECB).
Euro plummets as ECB signals interest rates have peaked
The euro pound exchange rate opened this week on a good note. Sterling was boosted by prevailing risk sentiment, while confidence in the euro was undermined after the European Commission cut its eurozone growth forecasts for this year.
But the pound was quick to give up these gains. The decline in sterling exchange rates began with the release of a mixed UK employment report.
The sell-off then accelerated mid-week, with GBP/EUR falling to a one-month low after the latest UK GDP figures reported a much bigger-than-expected drop in UK economic growth. in July.
Meanwhile, the euro’s gains were limited against the pound at this time as euro investors were reluctant to reposition ahead of the ECB’s latest interest rate decision.
In the second half of the week, the GBP/EUR exchange rate recovered from its worst levels following the ECB rate decision.
While it raised interest rates by 25 basis points to a record high of 4.5%, the bank also noted that this likely marks the peak of its tightening measures, which caused the euro to fall sharply.
The BoE, in the spotlight next week
It will be the Bank of England’s (BoE) turn to take center stage next week as it is scheduled to conclude its September policy meeting on Thursday.
The Bank of England is also widely expected to raise interest rates by 25 basis points, raising borrowing costs to 5.5% in the process.
The general consensus is that this will also mark the end of the Bank of England’s own rate-hiking cycle. Confirmation of which could see the pound come under similar pressure to the euro this week.
However, these expectations could be altered ahead of the Bank of England’s decision with the release of the UK consumer price index on Wednesday. A higher-than-expected inflation reading could reinforce expectations of further increases and lift the pound.
The end of the week will also see the release of the latest UK PMI readings, which could put pressure on the pound if private sector growth continues to contract this month.
The eurozone’s own PMIs will be the highlight for euro investors next week. Preliminary figures for September are expected to report a deepening contraction in the bloc’s manufacturing and services sectors, which could put further pressure on the euro.
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