The pound euro exchange rate rallied this week, supported by a moderation of Bank of England (BoE) interest rate cut expectations.
Pound firms amid pullback in BoE rate cut bets
The pound euro exchange rate got off to a poor start this week, with the pairing sliding to a new three-month low as GBP investors began pricing in a 50bps interest rate cut from the BoE in August.
Sterling was quick to bounce back. The currency rallied on Tuesday in response to a stronger-than-expected UK services PMI in addition to comments from BoE Chief Economist Huw Pill, who cautioned against the bank cutting interest rates too quickly.
The Eurozone’s own PMIs also beat expectations which capped the upside in GBP/EUR.
The pairing then traded sideways in mid-week trade, with the euro seemingly unable to find purchase, despite German business sentiment surprising to the upside in April.
A pullback in BoE rate cut bets lent support to the pound in the second half of the week, although these gains were capped as data reported a sharp drop in UK retail sales volumes this month.
Meanwhile, the euro struggled to attract support at the end of the week, despite some hawkish comments from European Central Bank (ECB) policymakers Isabel Schnabel and Madis Muller.
Dovish BoE forward guidance to sink Sterling?
Turning to next week, the BoE’s latest interest rate decision is likely to act as a key catalyst of movement for the GBP/EUR exchange rate.
The BoE isn’t expected to make any policy changes at its May meeting, but its forward guidance could trigger significant volatility in the pound.
If the BoE hints that it is nearing the start of its cutting cycle then Sterling is likely to falter.
On the other hand, if the BoE suggests that investors have become overzealous in their pricing in of rate cuts, then the pound could surge.
Meanwhile, the focus for EUR investors will be on the latest German GDP figures. The figures could place significant pressure on the euro if they report that the Eurozone’s largest economy slipped into a recession in the first quarter.
Also set to influence the single currency will be the Eurozone’s consumer price index. Will another slowdown in inflation reinforce ECB rate cut bets and drag EUR lower?
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