The pound euro exchange rate traded in a wide range this week, with the pairing approaching a multi-month high, before plunging in the second half of the session.
GBP/EUR spikes following UK and Eurozone PMIs
The pound euro exchange rate was initially muted this week. The pound was undermined by concerns that a rise in public sector pay could strain UK finances, while the euro was undermined by European Central Bank (ECB) rate cut bets.
These bets were then reinforced by dovish comments from ECB Vice President Luis de Guindos, paving the way for GBP/EUR to start appreciating on Tuesday.
The EUR selling bias remained in pressure as we entered the middle of the week. The euro being knocked by weaker-than-expected Eurozone PMIs, while Sterling sentiment was underpinned by upbeat PMIs from the UK.
However, the pound wasn’t able to sustain these gains through to the second half of the week. Sterling sentiment weakened following a Reuters poll of economists which predicted the Bank of England (BoE) is set to cutting interest rates at its next meeting.
Meanwhile, the euro’s negative correlation with the US dollar provided support to the single currency in the latter half of the session as the ‘greenback’ wavered.
BoE in the spotlight as August rate cut on a knife edge
Turning to next week, all eyes will be the on BoE’s interest rate decision on Thursday.
While the majority of economists polled by Reuters are confident the bank will cut rates at the start of August, markets still see the decision as a toss-up.
The uncertainty surrounding the decision could trigger some significant movement in the wake of the announcement. A cut is likely to send the pound plummeting, while a decision but the BoE to leave interest rates on hold could see GBP/EUR retest its recent multi-month highs.
In the meantime, the publication of the Eurozone’s latest GDP figures will be in the spotlight for EUR investors.
Economists forecast growth in the bloc will have slowed in the second quarter, which could weigh on the euro in the first half of the week.
This will be followed by the release of the Eurozone’s latest consumer price index, with further pressure likely to be driven by an expected slowdown in inflation in July.
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