The pound euro exchange rate struck a one-month high this week after the European Central Bank (ECB) opened the door to a June interest rate cut at its latest policy decision.
Euro slumps as ECB preparing to loosen monetary policy
After touching a two-week low last week in the wake of a lower-than-forecast UK services PMI, the GBP/EUR exchange rate managed to rally this week.
The increasingly risk-sensitive pound was initially supported by an improving market mood, while the safer euro struggled to attract support ahead of the ECB’s interest rate decision.
Sentiment then soured on Wednesday after the latest US inflation reading came in higher than expected, fuelling bets that the Federal Reserve would delay cutting rates, thereby keeping global borrowing costs higher. This saw GBP/EUR trim its gains.
However, the ECB decision on Thursday triggered a slump in the euro. The bank left rates unchanged, as expected, but paved the way for a rate cut in June.
ECB President Christine Lagarde also revealed that some policymakers had wanted to start loosening policy at this month’s meeting, which piled further pressure on the common currency.
At the end of the week, the pound rose to a one-month high against the euro. ECB rate cut bets continued to pressure EUR, while the UK’s latest GDP data boosted hopes that the British economy was out of its winter recession.
High-impact UK data to drive volatility?
Looking ahead to next week, we have some high-impact British data that could drive significant movement in the pound.
The first release is the UK’s latest labour market overview. Although unemployment is expected to have ticked higher, Sterling could strengthen off the back of an acceleration in wage growth as this could push back Bank of England (BoE) rate cut bets.
We then have the UK consumer price index on Wednesday, where a forecast cooling of inflation could drag the pound lower.
Finally, Friday brings the latest British retail sales figures and a speech from BoE policymaker Dave Ramsden. Sales growth and hawkish remarks could see GBP end the week strongly.
As for the euro, the key data release next week is Germany’s economic sentiment index for April. Could an improvement in morale in the Eurozone’s largest economy lend EUR some much-needed support?
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