The pound euro exchange rate faced a notable setback this week in response to dovish comments from Bank of England (BoE) Governor Andrew Bailey. 

Pound rocked by BoE rate cut uncertainty 

The pound euro exchange rate initially firmed this week. The single currency stumbling in response to dovish comments from several European Central Bank (ECB) policymakers.   

However, Sterling struggled to consolidate these early gains in response to a disappointing UK jobs report. February’s figures reported a larger-than-expected rise in domestic unemployment as well as a surprise deceleration in wage growth. 

At the same time, the euro benefitted from positive German data, as economic sentiment in the eurozone’s largest economy struck its highest level in over two years. 

The GBP/EUR exchange rate then surged to a one-month high in the middle of the week, following a hotter-than-expected UK inflation print. This caused GBP investors to trim their bets for a BoE interest rate cut at the start of summer.

However, the pound quickly came crashing back to earth following a speech by BoE Governor Andrew Bailey, in which he suggested inflation will see a ‘strong drop’ in April. 

Subsequent attempts by Sterling to recover were then undermined by the publication of the UK’s latest retail sales figures, after sales growth was shown to have stalled last month. 

UK and Eurozone PMIs in the spotlight 

Turning to next week, the publication of the latest PMIs from both the UK and Eurozone will likely act as the main catalyst of movement in the GBP/EUR exchange rate. 

GBP investors will be hoping to see activity in the UK’s private sector begin to pick up again this month. Signs that the UK economy got off to a solid start to the second quarter could encourage the BoE to leave interest rates on hold until later in the summer. 

While the Eurozone PMIs are unlikely to move the dial regarding an expected June rate cut from the ECB, the euro may still strengthen if April’s preliminary figures report the bloc’s private sector expanded for a second consecutive month. 

Also potentially influencing EUR exchange rates later in the week will be Germany’s latest IFO business climate index. Will another improvement in morale lift the euro on Wednesday? 

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