The pound euro exchange rate raced higher this week, with the pairing striking its best levels since August 2022 amid the fallout from the European elections.
Euro plummets amid European political uncertainty
The pound euro exchange rate soared as this week’s session opened. EUR sentiment weakened after far-right Eurosceptic parties made gains in European parliament.
However, it was French President Emmanuel Macron’s shock decision to call a snap election that really unnerved EUR investors.
This kept the euro on the defensive through the first half of the week, particularly after ratings agency Moody’s warning that the election could pose a risk to France’s credit score.
At the same time, the pound was supported through the first half of the week following the release of the UK’s latest jobs report.
While April’s release reported unemployment rose for the fourth consecutive month, strong wage growth tempered Bank of England (BoE) interest rate cut expectations.
GBP/EUR then continued to appreciate in the second half of the week, with the euro coming under pressure following a surprise contraction in Eurozone industrial production in April.
Sterling, meanwhile, struggled to find direction in the latter half of the week, as the UK Labour party’s 2024 election manifesto didn’t unveil any new plans for fiscal policy.
Cooling UK inflation to pull the pound lower?
Looking ahead, the Bank of England is set to conclude its latest policy meeting next week.
But with the odds of a June rate cut having effectively fallen to zero and the BoE’s forward guidance likely to be limited for fears of influencing the upcoming UK election, any impact on the pound euro exchange rate may prove minimal.
Instead, the primary focus for GBP investors is likely to be on the UK’s latest consumer price index. Economists forecast the CPI figures will report inflation cooled again in May, perhaps even falling below the BoE’s 2% target. Could this stoke expectations for a July rate cut and sap Sterling sentiment?
The end of the week will then see the release of the UK’s latest PMIs, with an uptick in service sector activity potentially providing support for the pound.
For EUR investors the publication of the Eurozone’s own PMIs will likely take priority next week. June’s preliminary figures could place further pressure on the single currency if they report private sector activity slowed last month.
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