The Pound-Euro rate could remain elevated if French debt fears persist, while the UK Budget and ECB guidance may drive fresh volatility around €1.19.
The Pound Euro (GBP/EUR) exchange rate marched higher last week, hitting a new 17-month high as the debt crisis in France continued.
At the time of writing, GBP/EUR was trading at €1.1939, up 0.6% on the week.
Pound to Euro (GBP/EUR): 1.194029 (-0.04%)
Euro to Dollar (EUR/USD): 1.120313 (-0.16%)
DAILY RECAP:
The Pound (GBP) traded in a narrow range at the start of the week as markets looked ahead to several key UK data releases.
Sterling gained ground on Tuesday after the latest UK jobs report revealed an unexpected fall in unemployment, strengthening expectations that the Bank of England (BoE) could adopt a more hawkish monetary policy stance.
Higher-than-forecast inflation figures provided further support on Wednesday. However, the Pound struggled to make gains against its stronger peers as unexpectedly high government borrowing fuelled concerns about the UK’s fiscal outlook ahead of the Autumn Budget.
Chancellor John Healey offered Sterling another boost on Thursday, signalling that the Budget would focus on ‘backing business’.
On Friday, the Pound initially retreated after UK retail sales data showed a sharper-than-expected decline in sales volumes. However, stronger-than-forecast PMI readings helped limit Sterling’s losses.
Meanwhile, the Euro (EUR) faced headwinds throughout last week’s trade, with EUR initially dented by a weekend of civil unrest in France and a fresh selloff in French government bonds.
Tuesday brought some downbeat German data, with October’s ZEW economic sentiment index deteriorating more than expected.
Recent protests and riots in France, Italy and elsewhere in the Eurozone continued weighing on the common currency as the week went on.
France’s bond crisis also worsened, with French bond yields continuing to rise. The French 10-year bond yield climbed above 5%, hitting its highest levels since 2002, deepening anxiety about a fiscal crisis in the Eurozone’s second-largest economy.
Near-Term GBP/EUR Forecast: UK Budget to See Sterling Fluctuate?
Looking forward, GBP investors are focused on the UK’s Autumn Budget, which Chancellor John Healey is due to deliver on Wednesday.
Healey faces the challenge of supporting economic growth while reassuring bond markets, against a backdrop of rising borrowing costs and limited fiscal headroom.
A favourable market response could lift Sterling, while disappointment over the Budget could trigger losses. Either way, the Pound may experience heightened volatility midweek as investors assess the Chancellor’s plans.
As for the Euro, the European Central Bank’s (ECB) interest rate decision on Thursday is the first major event. The bank is expected to leave rates unchanged, leaving the focus on forward guidance. If the ECB also raises concerns about France’s debt crisis, EUR could weaken.
The common currency could face fresh headwinds on Friday. The Eurozone’s latest GDP figures are due out, with markets expecting to see a sharp slowdown in growth in the third quarter.
