The British Pound and Euro (GBP/EUR) exchange rate fluctuated last week, heading broadly sideways as several economic data releases surprised markets.
Going forward, the May flash PMIs could cause significant moves. Additionally, concerns related to Brexit and the Ukraine crisis could inject additional volatility into the GBP/EUR pair.
British Pound (GBP) Exchange Rates Mixed Despite Strong UK Data
The British Pound (GBP) initially faltered early in the week as a risk aversion trend spread from Asian trading to European markets. However, with risk appetite picking up, the pound was able to rebound.
The GBP then surged higher, briefly hitting a two-week high against the Euro (EUR), after the latest UK jobs data beat forecasts. The unemployment rate unexpectedly fell to its lowest level in 48 years, while average earnings (including bonuses) increased by 7%.
However, the pound lost much of those gains after UK inflation rose from 7% to 9% in April, fueling cost of living fears. With inflation at its highest level in 40 years and a potential recession looming, sterling investors are worried about the country’s economic prospects.
Mixed manufacturing data on Thursday saw the pound falter. As production growth surged, UK businesses expressed concern about the future. Confidence slipped as manufacturers were likely to raise prices and cut investment plans.
The volatility continued until the end of the week. GBP/EUR fell on unexpected UK retail sales data. Economists had forecast a 0.2% contraction, but sales grew 1.4% instead. Still, the GBP/EUR faltered.
Euro (EUR) exchange rates falter amid mixed data and hawkish ECB expectations
Meanwhile, the Euro initially strengthened at the start of the week but then quickly headed south. The euro zone’s trade balance recorded a surprise deficit in March, while the European Commission lowered its growth forecast for 2022 from 4% to 2.7%.
The euro managed to regain lost ground on Tuesday after eurozone GDP growth beat forecasts. The GDP growth rate for the first quarter of 2022 came in at 0.3%, beating expectations of 0.2%.
Mid-week, the euro made limited gains against a weakening pound. The euro zone’s final inflation rate came in lower than expected, slightly dampening bets on a rate hike from the European Central Bank (ECB). The CPI came in at 7.4%, unchanged from the previous month and below initial estimates of 7.5%.
However, the hawkish tone of the minutes from the ECB’s April monetary policy meeting helped support the euro and kept it from losing out on a stronger pound.
GBP/EUR exchange rate forecast: PMI flash in the spotlight
Looking ahead to the week ahead, May’s flash PMIs for the UK and Eurozone are in the spotlight for the Pound-Euro pair.
Economists expect the Eurozone composite PMI to show a slight improvement, while the UK composite PMI is expected to decline slightly. If the PMI is in line with expectations, the GBP/EUR could slide.
However, after last week’s UK data massively beat forecasts, is there any chance the UK PMI could surprise on the upside?
The euro is also potentially facing damaging German data. Business and consumer morale in Europe’s largest economy is expected to remain near multi-month lows as soaring inflation and the fallout from the Russia-Ukraine war rattle the German economy. If the market forecast comes true, the euro could face some headwinds.
Speaking of the Russian-Ukrainian war, it only had a limited impact on the single currency last week, but the situation remains a source of uncertainty. If there are further escalations in the conflict, it could hurt euro exchange rates.
Meanwhile, any further developments regarding the Northern Ireland protocol dispute could impact the pound. Recently, the British government announced its intention to remove parts of the protocol, which prompted threats and criticism from European leaders.
Such a move could trigger a trade war between the EU and the UK, which would be disastrous for the UK economy. If tensions continue to simmer, the GBP could struggle.