The GBP EUR exchange rate jumped 250 pips this week towards the previously stubborn resistance at the 1.2000 level. Fears of a recession in Germany gave traders a greenlight to bid the pound sterling. We now head into another week of economic data, with European employment, German trade, and PMI figures being the likely rate drivers. The big day will be Thursday with another Bank of England rate meeting.
The GBP to EUR traded above the 1.1900 level heading into the weekend after almost touching the 1.2000 mark. That level provided stubborn resistance for the sterling in 2021.
Bank of England policy meeting will define the week
The Bank of England meets this week to discuss its monetary policy, and analysts expect a 25bps rate increase.
According to Reuters, the central bank is expected to back off from a larger interest rate rise in August and choose a 25 basis point increase, but some analysts are unsure. The BoE is trying to tackle forty-year highs in inflation, but there are also fears that moving too quickly with rate hikes will choke off economic growth.
Last week’s inflation print for the UK was 9.4%, adding some pressure to the BoE. Nonetheless, it predicted a 10% peak in inflation previously. The US Federal Reserve also raised its benchmark rate last week by 0.75% for the second month in a row, which will add to policymakers’ conversation.
The pound sterling found strength against the euro this week. It will likely wait until Thursday’s BoE update before any further significant moves.
Germany at risk of further gas woes as supply trickles in at 20%
Europe exits a short summer heatwave. However, there are fears of a harsh winter as Russia’s Nord Stream pipeline trickles in at a reduced capacity of 20%. There are worries that it may close completely with the EU scrambling to find alternatives.
The situation in Germany could wreak havoc on the country’s economy with business bankruptcies and soaring energy bills. The saga is a legacy of former Chancellor Angela Merkel, who ignored 15 years of warnings from her energy expert Claudia Kemfert that Russian over-reliance was a threat.
Viktorija Starych-Samuolienė from the think-tank Council on Geostrategy said the country faced a challenging winter due to its heavy reliance on gas from Russia. Russia stood accused of weaponising gas. German governments only deepened their reliance on Russian gas, opening the country up to risk.
Last week, Germany saw a big release of data on employment, consumer confidence, IFO business sentiment, and inflation. Those releases pointed to tough months ahead, and the Russian gas problem threatens to worsen the economic outlook further. Headlines over Germany’s gas supply could be an issue for the start of the week before the Bank of England meeting.
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