The pound euro exchange rate traded erratically this week, as the European Central Bank (ECB) delivered a widely expected interest rate cut. 

Euro rebounds on hawkish ECB rate cut  

The pound euro exchange rate got off to a positive start this week. Sterling was underpinned by improving market risk appetite, while the single currency stumbled as the Eurozone’s latest manufacturing PMI confirmed the bloc’s factory sector remained in contraction last month. 

This weakness in the euro persisted on Tuesday as Germany’s latest jobs report showed that the total number of unemployed people reached a three-year high in April. 

More pressure followed in mid-week trade as the Eurozone’s latest services PMI was revised lower in May, while the pound benefitted from risk-on flows. 

The second half of the week then saw the euro mount a recovery in the wake of the ECB’s latest interest rate decision. 

As EUR investors had already priced in the ECB’s decision to cut interest rates by 25bps, the euro was able to firm as the bank raised its inflation forecasts and was noncommittal regarding a July rate cut. 

Meanwhile, the pound struggled in the second half of the weak after a survey from the Bank of England (BoE) pointed to falling inflation expectations amongst UK businesses.  

Weak UK jobs report to drag on the pound? 

Looking ahead, the main catalyst of movement for the pound euro exchange rate next week is likely to be the publication of the UK’s latest jobs report. 

April’s figures could drag on Sterling if they show the UK labour market is continuing to cool and wage growth slowed again. 

Another weak jobs report is likely to place more pressure on the BoE to start loosening its monetary policy, with GBP exchange rates likely to falter if investors start to bet on a July rate cut. 

UK election jitters could also infuse some volatility into the pound next week, on the expectation that the main political parties will start to publish their manifestos.  

Meanwhile, the only Eurozone data of note next week will be the bloc’s latest industrial production figures, with an expected uptick in factory output potentially offering support to the single currency. 

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