The pound euro exchange rate trended broadly lower this week after the Bank of England (BoE) hinted at upcoming interest rate cuts.
Pound knocked by dovish BoE
The pound euro exchange got off to a mixed start this week. An initial uptick in the pairing proving short lived as a deterioration in market risk appetite took its toll on Sterling. While the euro bounced back following a stronger-than-expected Eurozone retail sales print.
GBP/EUR was met by some volatility in the middle of the week as GBP investors grew cautious ahead of the BoE’s latest interest rate decision, while the single currency was undermined by a contraction in German industrial production.
The pound then plunged on Thursday as the BoE finally delivered its latest interest rate decision. While the BoE’s decision to leave rates on hold was widely expected, the bank’s dovish forward guidance pulled Sterling lower.
BoE Governor Andrew Bailey reiterated that ‘all meetings are live’ and that the bank could cut rates at a faster pace than currently priced by markets.
This signalled to GBP investors that the BoE’s is unlikely to wait until after the summer to begin cutting interest rates and plunged GBP/EUR to a two-week low.
However, the pound was able to stage a recovery at the end of the week following the publication of the UK’s latest GDP figures. These revealed that a stronger-than-expected rebound in growth saw the UK emerged from a recession in the first quarter of 2024.
Slowing UK labour market to drag on Sterling?
Acting as a key catalyst of movement for the pound euro exchange rate next week will be the publication of the UK’s latest jobs report.
GBP investors are likely to be highly sensitive to any signs that the UK labour market is continuing to cool as this may place more pressure on the BoE to cut interest rates earlier. Expect to see Sterling slump if unemployment ticked higher or if wage growth slowed in March.
Meanwhile, the focus for EUR investors next week will be Germany’s latest ZEW economic sentiment index.
If we see morale in the Eurozone’s largest economy continue to improve this month, it’s likely to provide a boost to the euro in the first half of the week.
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