The pound euro exchange rate plunged to a one-month low this week, following the Bank of England’s (BoE) latest interest rate decision.
GBP/EUR plummets as BoE cuts rates
The pound euro exchange rate got off to a shaky start this week. Sterling was initially undermined by concerns over a £22bn black hole in the UK’s public finances.
However, the pound quickly rebounded as Chancellor Rachel Reeves ruled out any immediate changes on tax.
GBP/EUR then began to drift lower again through the middle of the week is response to some high impact Eurozone data.
The euro firmed as the bloc’s latest GDP and inflation figures both outpaced expectations, with the latter denting European Central Bank (ECB) rate cut bets.
However, the most dramatic movement in the GBP/EUR exchange rate was reserved for the second half of the week as the Bank of England (BoE) delivered its latest interest rate decision.
At the start of the week, investors viewed the decision as being on a knife edge. However, this gradually shifted as we got closer to the announcement on Thursday, with the odds of a 25bps rate cut rising to around 60% and applying pressure to the pound.
The BoE ultimately opted to deliver its first rate cut since 2020, lowering interest rates from 5.25% to 5%.
While the narrow vote in favour of the cut, as well as some hawkish comments from BoE Governor Andrew Bailey, initially appeared to temper the pound’s subsequent losses, the Sterling selloff gathered pace through the second half of the week, leading the GBP/EUR exchange rate to strike its worst levels since the start of July.
Rebound in German industrial activity to lift the euro?
Turning to next week, we may see data from Germany’s vital manufacturing sector influence the direction of the GBP/EUR exchange rate.
Economists forecast factory orders and industrial production will have returned to growth at the end of the second quarter, following sharp declines in May.
Could this help to ease concerns over Germany’s economy and lift the euro next week?
Meanwhile, the only UK data of note will be July’s finalised services PMI. This is expected to confirm a modest uptick in UK service sector growth and may offer some support to the pound at the start of the session.
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