The pound euro exchange rate firmed this week as positive market mood helped to offset rising Bank of England (BoE) interest rate cut bets. 

Pound underpinned by optimistic mood 

The pound euro exchange got off to a positive start this week. Sterling firmed as a report published by accounting and business advisory firm BDO, suggested the UK economy is ‘turning a corner’. 

However, GBP/EUR quickly came crashing back to earth on Tuesday. The pound plunged as signs of a slowing UK labour market caused the odds of a BoE interest rate cut in June to climb above 50%. At the same time, the euro was bolstered by a stronger-than-expected improvement in German economic sentiment this month. 

Sterling quickly found it feet again in mid-week trade, with the increasingly risk-sensitive currency benefitting from an improving market mood, after a slowdown in US inflation stoked Federal Reserve rate cut bets. 

GBP/EUR was then able to consolidate these gains through the latter half of the week as market risk appetite remained positive.  

This was despite comments from European Central Bank (ECB) policymaker Isabel Schnabel, who suggested that a July rate cut from the bank ‘does not seem warranted’. 

Sterling to plunge on sharp slowdown in UK inflation? 

Looking ahead, the highlight of next week’s data calendar will be the publication of the UK’s consumer price index. 

The BoE forecasts that UK inflation will have cooled significantly in April after the UK energy price cap was lowered. This could trigger a sharp slump in the pound euro exchange rate as it is likely to cement bets the BoE will start cutting interest rates in June. 

However, if the drop in inflation proves more modest than forecast, it could curb BoE rate cut bets and lift Sterling. 

GBP exchange rates will also be influenced by the publication of the UK’s latest PMIs. The pound looks poised to rally if May’s preliminary figures report another strong expansion in the UK’s services sector. 

Meanwhile, the focus for EUR investors next week will be the Eurozone’s own PMI figures. Will another acceleration of growth provide a boost for the euro at the end of the week? 

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