The pound euro exchange rate briefly struck a 21-month high this week, before quickly falling back as Eurozone inflation outpaced expectations.
Pound underpinned by optimistic mood
The pound euro exchange rate opened this week on positive footing. EUR exchange rates were pressured by European Central Bank (ECB) policy speculation. While a surprise expansion in UK retail sales activity lifted Sterling.
GBP/EUR initially raced higher on Wednesday, with the pairing briefly being catapulted to its best levels since August 2022, before these gains were swiftly erased after Germany’s latest consumer price index reported inflation in the Eurozone’s largest economy accelerated in May.
The pairing then traded sideways on Thursday as an improving market mood led EUR investors to shrug off the latest jobs data from the Eurozone, despite reporting that unemployment in the bloc fell to a new record low in April.
Closing out the week was the publication of the Eurozone’s latest CPI figures. May’s preliminary figures reported that inflation accelerated for the first time since November and at a faster pace than economists had predicted.
This strengthened the euro as it caused EUR investors to trim expectations for an ECB rate cut in July.
ECB interest rate decision to infuse volatility into the euro?
Turning to next week, all eyes will be on the ECB, as it is widely expected to deliver a 25bps interest rate cut when it concludes its latest policy meeting on Thursday.
As the rate cut has already been priced in by markets any resulting movement in the euro is likely to be dictated by the ECB’s forward guidance.
In light of the recent uptick in inflation the bank may signal that it will hold fire on further cuts for the time being. A move which could spark a sharp appreciation of the euro.
On the other hand, if ECB President Christine Lagarde hints that the bank may be open to loosening its monetary policy again in June, the euro may test new lows against the pound.
Meanwhile, with GBP data in short supply, attention may shift to the UK’s upcoming general election.
Could policy pledges from Labour or the Conservatives infuse some volatility into the pound?
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