Where Next For GBP/EUR Exchange Rate Buyers?

The Pound-to-Euro (GBP/EUR) exchange rate soared to a near one-month high last week as a risk-on mood and hopes of a milder UK recession boosted the Pound (GBP).

At the time of writing, GBP/EUR was trading at €1.1631, over 1% higher than at the start of the week.

Pound (GBP) Exchange Rates Surge amid Hopes of Milder UK Recession

The Pound wavered against the Euro (EUR) at the beginning of last week as a lack of UK economic data and a mixed response to the government’s Autumn Statement left GBP without a clear direction.

Sterling then managed to zigzag higher. News that mortgage rates were falling and two workers’ unions called off strikes helped offset worries about the UK economy. However, GBP slipped from Tuesday night through to Wednesday morning.

GBP/EUR then surged higher on Wednesday. Better-than-expected UK PMIs raised hopes that the UK’s current recession would be milder and shorter than initially feared. In addition, the supreme court ruled that a second Scottish independence referendum could not go ahead without Westminster’s approval, alleviating some political fears.

UK optimism received another boost as markets massively scaled back expectations for further aggressive Federal Reserve interest rate rises. Higher US interest rates would likely hurt the UK economy and push up government borrowing costs, with the British public finances already in a dire state. Conversely, lower interest rates take pressure of the UK economy and the British government coffers.

GBP/EUR trimmed its gains towards the end of the week as risk appetite faded, denting the Pound against the safer Euro. In addition, Royal Mail and Amazon strikes on Black Friday – a crucial retail holiday – worried GBP investors. Still, the Pound remained up on the week.

Euro (EUR) Exchange Rates Struggle amid Risk-On Rally

Meanwhile, the Euro (EUR) shrugged off an unexpected sharp decline in German producer price inflation on Monday, initially dipping but regaining ground later on.

EUR struggled again on Tuesday morning after Russia’s Gazprom threatened to cut gas supplies to Europe via Ukraine. However, the single currency recouped its losses after Eurozone consumer confidence beat forecasts, recovering from -27.5 to -23.9, rather than -26.

Midweek, a sharp risk-on rally in global markets saw the safe-haven Euro slump against the riskier Pound. Markets were cheered by expectations of slowing Fed rate hikes.

Thursday brought further losses for EUR, despite a better-than-expected improvement in German business morale. The downside was exacerbated by the European Central Bank’s (ECB) latest meeting minutes. Policymakers were concerned about a potential Eurozone recession, and these fears may see the ECB take a softer approach to interest rate rises.

Mixed German data caused uncertain movement in EUR on Friday. Consumer confidence in Europe’s economy improved less than expected, while Germany’s final GDP growth rate for Q3 was revised marginally higher.

GBP/EUR Exchange Rate Forecast: Eurozone Inflation in Focus

Looking to the week ahead, we could see some mixed movement in GBP/EUR.

On Tuesday, the Eurozone’s latest economic sentiment index is forecast to rise for the first time since February, which could give EUR a lift.

However, Wednesday brings the bloc’s flash inflation rate for November. At the time of writing, economists’ consensus estimates see inflation easing from 10.6% to 10.4%. If the headline CPI does cool, it may see markets pare back ECB rate rise bets, which in turn could dent the Euro.

As for the Pound, the Confederation of British Industry’s (CBI) distributive trades data is expected to show a decline, which could hurt Sterling.

GBP investors may also look to speeches from Bank of England (BoE) policymakers Catherine Mann and Huw Pill. If the two signal further interest rate rises, GBP could strengthen, while the Pound may weaken if they express fears about the coming recession.