GBP/EUR suffered last week on the back of the possibility of a widening differential in interest rates between the Bank of England (BoE) and the European Central Bank (ECB). This could lead to Sterling being priced well below 1.12 this week, potentially even below 1.11. Sterling started the week at low levels after declining for the previous five days, with the largest losses seen following policy announcements from the BoE and ECB.

BoE Governor Andrew Bailey stated in a press conference that while they have seen improvement, there are still significant risks to the economy. If these risks materialize and there are further overshoots in wage and service inflation data, the BoE will need to respond with further rate hikes.

With this in mind, the BoE raised the Bank Rate to 4% last week but did not commit to further increases in the future, recognizing the risk of higher borrowing costs. The ECB, on the other hand, confirmed that interest rates will rise further in March and in the months following.

The conflicting policy outlooks are putting pressure on GBP/EUR, which may remain suppressed this week with members of the BoE Monetary Policy Committee speaking ahead of Friday's GDP data. If the GDP data comes in weaker than expected and confirms a UK recession, this could lead to a revision of expectations for Bank Rate. The possibility of a recession is still uncertain as economists predict 0% growth in the last quarter due to an expected -0.3% reading for December GDP.