The pound euro exchange rate struck a near four-month low this week as markets priced in two more interest rate cuts from the Bank of England (BoE) this year.
Pound slumps amid BoE rate cut speculation
The pound plunged on Monday as a global market selloff drained support for the increasingly risk-sensitive currency. The rout was triggered by worries of a US recession following weak American jobs data and a shock interest rate hike from the Bank of Japan (BoJ) last week.
Meanwhile, the safer euro was able to capitalise on the risk-averse market mood, with EUR also enjoying its negative correlation with a tumbling US dollar. A stronger-than-forecast Eurozone producer price index also aided the common currency.
Sterling then slumped to a near four-month low against the euro on Tuesday as the recent market panic and last week’s rate cut from the BoE saw investors start pricing in a faster pace of policy unwinding over the next few months.
Civil unrest in England and Northern Ireland also undermined the pound, as violent riots shattered the UK’s recently reclaimed image of stability.
Although markets stabilised as the week went on, lingering volatility and some upbeat industrial data from Germany kept GBP/EUR on the back foot.
An improving market mood on Thursday, however, weighed on the euro and boosted the pound, allowing the pairing to recoup some losses.
Nevertheless, the pound euro exchange rate could end the week around 0.7% lower overall.
High-impact data to drive further volatility?
Next week could bring more volatility amid plenty of high-impact data, with the potential for GBP/EUR to strengthen.
Sterling could first face notable selling pressure on Tuesday, as the latest UK jobs data is expected to reveal a rise in unemployment and a sharp slowdown in wage growth.
However, the UK’s consumer price index on Wednesday is forecast to show that inflation accelerated in July, from 2% to 2.3%, which could boost GBP.
UK GDP for the second quarter is then due out on Thursday, with the UK economy expected to have expanded by 0.5% in the three months to June.
Finally, British retail sales for July are then due out on Friday. Could the warmer weather last month have spurred a rebound in consumer spending?
As for the euro, an expected decline in German economic sentiment in August could weigh on EUR on Tuesday.
The Eurozone’s second estimate for Q2 GDP growth may then only impact the single currency if it differs from the preliminary estimate.
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