The Pound Euro exchange rate plummeted this past week after the Bank of England (BoE) published some dire forecasts for the UK economy at its latest interest rate decision.
As the Sterling crashed, the Euro was able to strengthen, despite some poor economic data coming out of the Eurozone.
Pound Exchange Rates Nosedive on Bleak BoE Predictions
The Pound slipped on Monday amid thin trading conditions during the UK’s Early May Bank Holiday. In addition, a risk-off mood following a flash crash in European stock markets – caused by a trader error – weighed on the risk-sensitive Pound.
GBP/EUR continued to soften as the week went on, despite the UK’s final manufacturing PMI being revised higher than preliminary estimates.
Mid-week, the Sterling initially ticked higher as UK government bond yields picked up ahead of the BoE decision. However, the UK announced a ban on services exports to Russia, which exerted some pressure on the Pound.
The Pound then plummeted on Thursday following the BoE meeting. The bank raised its inflation projections, with UK inflation now expected to peak at over 10% in autumn, while slashing growth forecasts, stoking fears that the UK could be heading towards stagflation.
Despite this, the BoE still raised interest rates by 25 bps, with three policymakers voting for a steeper 50-bps hike. This shows just how difficult the UK’s situation is, with officials feeling compelled to raise rates despite the serious downside risks.
Markets now expect the BoE to be near the top of its tightening cycle, meaning that they will not raise interest rates as high as markets had expected. As a result, GBP/EUR tumbled to a five-month low.
Euro Exchange Rates Strengthen despite Bad Week for Data
Meanwhile, the Euro was able to firm against the Pound early in the week, showing resilience despite disappointing Eurozone data. Economic sentiment in the bloc slipped by more than forecast, while the Eurozone’s unemployment rate didn’t fall by as much as markets had expected.
Wednesday brought more poor economic reports. Germany’s trade surplus narrowed in March and Eurozone retail sales contracted by 0.4% over the same month. However, EUR/GBP still managed to rise.
One factor supporting EUR was its negative correlation to a weakening US Dollar.
The single currency then surged higher against the plummeting Pound following the BoE decision. The Euro seems to have benefitted from flows away from the Sterling, while the prospect of narrowing policy divergence also supported EUR/GBP.
With the BoE looking like it could stop raising interest rates soon, and with the European Central Bank (ECB) expected to begin hiking rates in the third quarter of this year, EUR/GBP may be at the start of a long-term uptrend.
Poor German data did little to limit EUR’s gains. On Thursday, Germany’s factory orders printed at -4.7%, and on Friday industrial production came in at -3.9%. Nevertheless, the single currency stayed strong.
Turning to the week ahead, Germany’s ZEW economic sentiment is in focus early in the week. Economists expect it to edge lower this month, which could put some pressure on the Euro.
For the Pound, the latest GDP reports are in focus. UK GDP is expected to print at 0.1% month on month in March, matching the near-stagnant growth seen in February. Following the BoE’s bleak GDP forecasts, the Sterling could be particularly sensitive to this release.
If GDP prints as expected, or comes in lower, the Pound could fall. If it comes in higher, it could offer a small ray of hope and provide GBP with a modest lift.
Meanwhile, domestic economic and political headlines from the UK could also cause movement, along with any developments in Ukraine.
EUR/GBP Long (Buy)
Enter at: 0.85602