The GBP EUR exchange rate was lower this week after the latest Bank of England interest rate rose to 1.175%. Despite a 50bps increase by the BoE, sterling dropped below the 1.1900 level as the central bank warned of higher inflation and a potential recession that would last until the end of 2023 due to higher energy costs and the pressure on real wages.
The GBP v EUR opened the week at 1.1906 and headed for the weekend near 1.1860.
Bank of England raises rates at the fastest rate for 27 years
This week, the Bank of England was the critical event, and policymakers lifted interest rates by 0.50% for the most significant move in 27 years.
Inflation is soaring in the country, and the bank raised its forecast once more to 13% for the peak in inflation as it expects the rise in wholesale gas prices impacted consumers.
The bank also lowered its forecast for UK growth to 3.5pc this year, from 3.75pc in its previous forecast. The economy is expected to shrink by 1.5pc in 2023 and 0.25pc in 2024, marking the longest downturn since the 2008 financial crisis. The BoE also expects real wages to be 3.5pc lower this year and 4.5pc in 2023, despite companies offering salary increases and one-off bonus payments to hold on to workers.
According to the BoE statement, the pressures of inflation in the UK and across Europe ramped up substantially since the May Monetary Report and MPC’s last meeting. That mainly shows a near doubling in wholesale gas prices since May.
Other data in the UK showed services slipping to a 17-month low, with the S&P Global PMI survey hitting 52.6 in July, down from 54.3 a month earlier. The number still highlights expansion above the 50 levels. However, the decreased levels of discretionary spending and efforts by companies to reduce expenses from surging inflation contributed to squeeze demand.
German trade boosts euro, but gas prices remain elevated
German trade balance figures were brighter this week, with the country avoiding a trade deficit. The statistics helped to raise the euro after the country posted weaker than expected retail sales.
PMI figures were also weaker in the final reading for Germany and the Eurozone, with services and manufacturing still strained and dragging the composite index below the 50 contraction level.
Chris Williamson, chief economist at S&P Global Market Intelligence, said manufacturing activity in Europe’s largest economy and the more significant bloc was “sinking into an increasingly steep downturn, adding to the region’s recession risks”.
Volumes of retail sales fell by 8.8 per cent in Germany in June compared to the previous month, according to Destatis. That marked the most significant annual fall since records began in 1994.
With economic figures still leaning to the downside, the European economy grinds towards a recession and gas price futures were near their yearly highs this week despite being far from the winter pain point.
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