The Pound to Euro (GBP/EUR) exchange rate fell to a 16-day low last week as concerns over the UK government’s fiscal plans overshadowed stronger domestic economic data and weighed on Sterling.
At the time of writing, GBP/EUR was trading around €1.1708, down more than 0.4% over the week.
DAILY RECAP:
The Pound (GBP) came under pressure at the start of the week after Prime Minister Andy Burnham surprised markets by appointing former Defence Secretary John Healey as Chancellor.
Sterling remained on the defensive as concerns grew over the government’s commitment to fiscal discipline, particularly after Burnham outlined proposals for a series of tax cuts.
These political developments drew attention away from several key UK economic releases, including the latest labour market figures and consumer price index.
The inflation data delivered a mixed picture and did little to shift Sterling. Headline CPI slowed from 2.8% to 2.6%, falling by more than expected, while core inflation unexpectedly held at 2.6% rather than easing to 2.5%.
Stronger UK data later in the week also had little impact on the Pound, despite June retail sales and the preliminary July services PMI both unexpectedly beating forecasts, as fiscal concerns continued to dominate sentiment.
Meanwhile, the Euro (EUR) initially weakened after German producer prices contracted by more than expected in June, weighing on Eurozone inflation expectations.
However, stronger German data on Tuesday helped lift the single currency, with the ZEW economic sentiment index rising from 10.5 to a five-month high of 26.3.
The Euro also benefited from a more cautious market mood later in the week, while the European Central Bank’s interest rate decision had only a limited impact. Although policymakers warned inflation is likely to remain elevated, they also highlighted growing risks to the economic outlook.
The Euro climbed to a 16-day high against the Pound on Friday after stronger-than-expected Eurozone PMI data, with GBP/EUR remaining around those levels into the weekend.
Near-Term GBP/EUR Forecast: BoE Decision in the Spotlight
Looking ahead, the Bank of England’s interest rate announcement on Thursday will be the key event for Pound investors.
Markets broadly expect policymakers to leave interest rates unchanged, meaning attention is likely to focus on the Bank’s guidance.
If officials indicate that further interest rate increases remain possible in the coming months, particularly following the recent rise in energy prices, Sterling could find renewed support.
Before then, political developments are likely to remain an important driver for the Pound.
Meanwhile, the Eurozone’s preliminary second-quarter GDP estimate is due on Thursday, with stronger growth likely to support the Euro.
Friday then brings the bloc’s preliminary July inflation figures, where a further increase in price pressures could also underpin the single currency.
Our currency coverage draws on live market data, official economic releases and published bank research.
