The GBP EUR exchange rate was weaker this week after the gains acquired over the last month hit a roadblock in the form of the Bank of England.
Gloomy forecasts for inflation and recession caught markets off guard came, grappling with the most significant rate increase since 1995. The pound sterling versus the euro paused on the latest developments, but could still advance as gas prices in Europe near weekly highs.
The GBP to EUR was back below the 1.1900 level this week after flirting with the 1.2000 level again.
Bank of England updates will guide the pound sterling this week
The Bank of England’s most significant rate hike since 1995 will dominate this week’s price action in a relatively light economic calendar.
We said in our weekly updates that the Federal Reserve’s aggressive 0.75% move last week also gave the BoE a greenlight to go with the higher move. Borrowing costs were lifted to 1.75% in the UK after the 0.50% rate hike. Around 70% of economists in a Reuters poll anticipated this increase.
That was also driven by the bank raising its inflation rate peak to 13%, which caught markets off guard, while the Resolution Foundation think tank sees 15% next year. The other talking point was that the BoE said a recession was coming by the end of the year – in contrast to the IMF – and that the downturn would last into the end of next year. That took traders by surprise and will weigh on the sterling this week.
The pound sterling will see the release of BRC retail sales on Tuesday, which will likely show further pressure on consumer spending. Wednesday brings a final reading of inflation for the German economy in July.
Gas prices in Europe are near yearly highs as summer winds down
The German inflation number will confirm previous readings, which saw prices dip primarily due to temporary support from the government on public transport costs. The initiative may be extended, but the outlook is still challenging for the eurozone.
This week saw Dutch gas price futures trading near their yearly highs, and that should be a worry for the European economy as we are only in the first week of August.
Those wholesale prices could have further to travel over the coming months, which will strain Europe. Last week saw Germany avoid a trade deficit after a protracted downtrend, but that has been the only bright spot for economic data in Europe’s largest economy.
Due to the gas crisis, there is still a significant risk in the euro currency. We could see growing unrest amongst the population worldwide. Sri Lanka’s population stormed the Presidential palace, while in Panama, there have been large protests over the rise in inflation.
We saw government price controls on food items and drug prices, based on inflation of only 5.2%. Emerging markets feel the strain of the rising dollar and see turmoil first. However, these tensions can gravitate to the powerful centre. Central banks are in for a tough few months of decision-making.
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