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GBP/EUR Exchange Rate Slips Ahead Of ECB

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The Pound Euro (GBP/EUR) exchange rate slipped on Thursday morning as Sterling’s recent rally began to fizzle out.

At the time of writing, GBP/EUR was trading at around €1.1516, down 0.2% from the start of Thursday’s European session.

Pound (GBP) Exchange Rates Falter as Rally Fizzles Out

The Pound (GBP) ticked lower on Thursday morning as the tailwinds that drove gains through Tuesday and Wednesday began to weaken.

Sterling had enjoyed a strong two-day rally after Rishi Sunak was announced as the new UK Prime Minister. Markets hoped that Sunak would restore financial and political stability after his predecessor’s short and tumultuous premiership.

However, as the afterglow began to wear off, investors once again became aware of the precarious position of the UK economy.

Recent data has indicated that the country is already in a recession, while 40-year high inflation and rising interest rates are putting a tight squeeze on both businesses and households. In addition, government debt is worryingly high.

Sunak must now make fiscally difficult decisions, trying to find money to plug a large gap in government funding but avoid deepening the recession, squeezing incomes further, or borrowing large amounts and spooking markets.

bannerThese concerns saw Sterling hit a ceiling on Wednesday, with GBP beginning to trim its gains on Thursday.

Still, UK markets appeared to have stabilized and the Pound was in a much stronger position than it had been for weeks.

Euro (EUR) Exchange Rates Limited ahead of ECB Decision

Meanwhile, the Euro (EUR) ticked higher against the Pound, but was fairly muted elsewhere, as EUR investors awaited the European Central Bank (ECB) interest rate decision.

Markets expected a 75 basis point rate rise from the bank as it rushes to get inflation under control.

However, there was uncertainty about how the ECB would act at future interest rate decisions. Traders had been pricing in expectations of a further 75bps rise in the December meeting, but recent Eurozone economic data has continued to show a deepening contraction in business activity.

As a result, markets were muted as investors preferred to wait until after the ECB decision before placing any aggressive bets.

A slight improvement in German consumer confidence may have given EUR a small lift in the morning, although the result was as expected.

GBP/EUR Exchange Rate Forecast: ECB Decision in the Spotlight

Looking ahead, the ECB interest rate decision is in focus. If the bank does raise interest rates by another 75 basis points, the single currency could further strengthen against Sterling.

However, investors will be looking carefully at the ECB’s forward guidance. Suggestions that another large hike is on the table for December could boost EUR, while any signals that the bank may slow its pace of tightening in response to an economic slowdown could dent the currency.

Staggered through the afternoon following the decision, we also have the ECB press conference and a speech later on from Christine Lagarde, the bank’s president. Any comments during these events could also impact EUR, so the Euro may see volatility through the afternoon.

As for the Pound, domestic UK political news could continue to impact GBP. Sunak has recently come under pressure for his reappointment of Suella Braverman as Home Secretary, though she was sacked last week for a security breach.

Some Tory MPs have expressed concern at the appointment, which was seen as a political move to keep the European Research Group (ERG) wing of the Conservative Party on side for Sunak. Fears that Sunak’s fragile alliance may come under strain could impact GBP.

However, currency markets are more concerned about UK fiscal and economic policy. While we await the government’s full fiscal statement, ministers may hint at some of the measures being considered, which could affect the Pound.