The pound euro exchange rate struck a near three-month high this week as markets reined in their expectations for a Bank of England (BoE) interest rate cut in June.
Pound rallies as BoE June cut looks unlikely
The pound strengthened this week, hitting a three-month high against the euro.
Sterling’s strength initially came after the International Monetary Fund (IMF) upgraded its growth forecasts for the UK economy this year.
Meanwhile, a weaker German producer price index applied some pressure to the euro.
Hotter-than-forecast UK inflation figures then boosted the pound on Wednesday. With British inflation easing less than forecast, markets repriced their expectations for a June rate cut from the BoE.
This was fuelled further by UK Prime Minister Rishi Sunak calling a snap election. With Brits heading to the ballot box on 4 July, the BoE is even less likely to cut rates next month.
The euro was able to recoup some of its losses in the wake of the latest PMI readings. While both the UK and Eurozone indexes were mixed, investors looked more favourably on the euro following their release, particularly as UK service sector activity slowed to a six-month low.
A 2.3% slump in UK retail sales in April put additional pressure on the pound on Friday, further trimming GBP/EUR’s gains.
However, Sterling still ended the week up against the single currency, with the pound euro exchange rate up roughly 0.5% from the start of the week’s session.
Sticky Eurozone inflation to boost the euro?
Turning to next week, market-moving UK data is in short supply, which could leave the increasingly risk-sensitive pound to be driven by market sentiment. If global risk appetite improves, Sterling could gain ground.
In addition, the recent pullback in BoE rate cut bets could continue to underpin the pound.
Meanwhile the Eurozone’s preliminary consumer price index for May is the focus for EUR investors. Due out on Friday, the CPI is forecast to show a slight uptick in inflation. If this dampens bets on the European Central Bank’s (ECB) upcoming rate cutting cycle, the single currency could strengthen.
Before then, some positive Eurozone data releases could support EUR.
Germany’s business climate indicator and consumer confidence index are due to show improvements on Monday and Wednesday, respectively, potentially lifting the euro.
On Thursday, an uptick in Eurozone economic sentiment and another low reading for the bloc’s unemployment rate could also see EUR garner support.
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