The pound euro exchange rate trended broadly lower this week, despite data showing that Eurozone inflation cooled more than expected last month.
Pound knocked by service sector slowdown
The pound euro exchange rate opened this week on the front foot. Sterling was supported by a revision to the UK’s latest manufacturing PMI, which showed the factory sector saw its first expansion since July 2022.
However, these gains didn’t last for long, with the euro quickly mounting a comeback thanks to its negative correlation with the US dollar, amid notable USD selling pressure.
The euro was able to maintain a positive trajectory in mid-week trade despite the Eurozone’s latest consumer price index printing below expectations.
While March’s preliminary CPI figures reported a cooling of both headline and core inflation, with the latter striking its lowest levels since February 2022, it didn’t appear to be enough to move the needle regarding bets for a European Central Bank (ECB) interest rate cut this month.
The downside in GBP/EUR was then extended in the second half of the week following the publication of the UK’s latest services PMI. March’s finalised index saw growth in the UK’s vital services sector revised lower.
GBP investors speculated this slowdown could place more pressure on the Bank of England (BoE) to start cutting interest rates.
ECB rate decision to infuse volatility in the euro?
Turning to next week, the ECB’s latest interest rate decision will no doubt be the primary catalyst of movement for the GBP/EUR exchange rate.
The current market consensus is that the ECB will keep interest rates on hold again at its April policy meeting.
However, there is an outside chance the ECB could surprise by opting to start cutting rates this month, an outcome which could see the euro fall off a cliff.
Even if the ECB holds off on loosening its monetary policy this month, the euro is likely to fall if the bank signals a rate cut will be coming in June.
In the meantime, Germany’s latest industrial production figures could act as a headwind if they report a slowdown in factory output in February.
For GBP investors the focus will be on the UK’s latest GDP figures. Economists forecast domestic growth will have contracted in February, will this pull the pound lower?
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