The pound euro exchange rate rallied to a four-week high this week, as GBP investors repriced their expectations for an August interest rate cut from the Bank of England (BoE).
Pound jumps on hawkish BoE remarks
Trade in the pound euro exchange rate was erratic at the start of this week, amid the surprise outcome of the French legislative election.
The second round saw the far-right National Rally party relegated to third place to the relief of EUR investors. However, the resulting hung parliament ultimately capped these gains amid concerns this could lead to political deadlock in the Eurozone’s second-largest economy.
Meanwhile, Sterling was broadly supported through the first half of the week by optimism over the new Labour government’s plans for growth, although some profit taking limited the pound’s upside potential.
GBP/EUR then began to catch bids in mid-week trade, following remarks from BoE Chief Economist Huw Pill. Pill poured cold water on expectations for an August interest rate cut from the UK central bank as he warned about ‘uncomfortable strength’ in services price inflation and wage growth.
The upswing in Sterling was then extended in the second half of the week after the latest monthly UK GDP print outpaced expectations.
At the same time, confirmation that German inflation cooled last month, coupled with French political jitters kept the euro on the defensive through the latter half of the week.
Dovish forward guidance from the ECB to drag on the euro
Turning to next week, the ECB’s latest interest rate decision will likely act as the primary catalyst of movement for the GBP/EUR exchange rate.
While the ECB cut rates following its June meeting, the general consensus is that the ECB will opt to keep rates on hold this time around, particularly after the minutes from the previous meeting showed that support for the cut was far from unanimous.
However, even if the ECB leaves its monetary policy unchanged this month, the euro is likely to fall if the bank signals more rate cuts are coming in the second half of 2024.
Meanwhile, GBP investors will be kept on their toes with the publication of some high-impact UK economic data.
The UK’s latest inflation and wage growth figures will be the main focus, with the pound potentially giving some ground if they revive bets for an August rate cut.
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