The pound euro exchange rate strengthened this week in response to stronger-than-expected UK PMI figures. 

Pound firms as strong UK private sector growth dents BoE rate cut bets 

The pound euro exchange rate got off to a slow start this week. Sterling sentiment was undermined by Bank of England (BoE) interest rate speculation, while a prevailing risk-on mood limited the appeal of the safe-haven euro. 

The euro then began to find its footing in the first half of the week, as the single currency was buoyed by its negative correlation with the US dollar. 

However, the resulting downside in GBP/EUR didn’t last for long, with the pound able to claw back its losses in mid-week trade. Despite a larger-than-expected rise in UK government borrowing stoking concerns over potential tax hikes from Chancellor Rachel Reeves in her upcoming budget. 

This recovery in GBP/EUR then accelerated sharply as we entered the second half of the week, following the publication of the latest PMIs from the UK and Eurozone. 

Surprisingly strong UK private sector growth in August helped to underpin Sterling as it was seen as weakening the odds of a BoE rate cut in September. 

In contrast, the Eurozone PMIs took their tool on the euro. In addition to reporting a larger-than-expected contraction in the manufacturing sector, analysts warned the surprisingly strong growth in the services sector was due to a temporary uplift from the Paris Olympics. 

Cooling Eurozone inflation to pull the euro lower? 

Turning to next week, it’s likely that the Eurozone’s latest consumer price index will act as the main catalyst of movement for the pound euro exchange rate. 

August’s preliminary CPI figures could pull the euro lower as they are expected to report a cooling of inflation, which may bolster expectations the European Central Bank (ECB) will cut interest rates again in September. 

Also of note to EUR investors will be Germany’s latest IFO business climate survey. If the index shows that business sentiment continued to deteriorate this month the euro could face some resistance at the start of the session. 

Meanwhile, UK economic data is in short supply next week. This may leave movement in the pound to be dictated by market risk dynamics. Will a cautious mood see Sterling relinquish some of its recent gains? 

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