The pound euro exchange rate traded in a wide range this week, with the pairing relinquishing its initial gains following some bleak forecasts for the UK economy.
Pound falters on UK growth warning
The pound euro exchange rate opened this week on firm footing. Sterling was supported by risk-on flows, while the single currency was undermined by a softer-than-expected German inflation print.
Stronger-than-expected Eurozone GDP and inflation figures then helped the euro to bounce back on Tuesday. The robust data saw some EUR investors reprice their expectations for interest rate cuts from the European Central Bank (ECB) in the second half of the year.
The euro struggled to build on this momentum as the closure of most of the Eurozone for May Day created thin trading conditions in the currency. However, a deterioration in market sentiment ultimately led GBP/EUR to soften in mid-week trade.
The pound was then met by additional pressure on Thursday, after the Organisation for Economic Co-operation (OECD) slashed its UK growth forecasts, predicting that the country will be the slowest growing member of the G7 in 2025.
GBP/EUR then closed the week on a positive note after the UK’s latest services PMI confirmed growth in the sector climbed to an 11-month high in April.
BoE rate decision to infused volatility into 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 of rate cuts, then the pound could surge.
Also of note to GBP investors will be the publication of the UK’s latest GDP data. The preliminary figures for the first quarter are expected to report the UK returned to growth after slipping into a recession in the second half of 2023. Will this be enough to reverse any BoE driven losses?
In the meantime, the focus for EUR investors is likely to be on Germany’s latest industrial data. Could a contraction in factory orders in March act as a headwind for the euro?
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