The pound euro exchange rate traded in a fairly narrow range this week as the European Central Bank (ECB) delivered its second interest rate cut of the year.
Euro subdued following ECB rate cut
The pound euro exchange rate got off to a slow start this week. While Sterling struggled to find direction amid a lull in data, the euro was simultaneously undermined by its negative correlation with the US dollar.
Sterling then began to catch bids in the wake of the UK’s jobs data. July’s figures reported domestic unemployment fell to a six-month low in July. However, the pound’s gains proved fleeting as the data also reported a cooling of wage growth over the same period.
The GBP/EUR exchange rate then struck a three-week low on Wednesday as the UK’s latest GDP figures showed that domestic growth stalled again in July, with the pound weakening amid speculation this increases the odds of a November interest rate cut from the Bank of England (BoE).
GBP/EUR was then quick to rebound in the second half of the week as the ECB concluded its latest policy meeting with the announcement of a widely expected 25 basis point rate cut.
While ECB President Christine Lagarde was reluctant to hint at further cuts in the near-term, her warning that risks remain titled to the downside for the Eurozone, along with the slashing of the bank’s growth forecast acted as a headwind for the single currency through the latter half of the session.
BoE policy divergence to lift the pound?
Looking ahead, the Bank of England is set to conclude its latest policy meeting next week.
In contrast to the ECB and the Federal Reserve, the BoE is widely expected to keep interest rates on hold this month.
This divergence in policy may help to underpin the pound this week, unless the BoE’s forward guidance heavily hints at a cut in November.
In the meantime, the UK’s latest consumer price index will be closely watched by GBP investors. Economists forecast the CPI figures will report inflation cooled in August, following the uptick in July.
However, if inflation outpaces expectations this is likely to weaken bets for further cuts from the BoE and could propel GBP/EUR sharply higher.
For EUR investors the publication of Germany’s latest ZEW economic sentiment index will likely be the main focus next week. If the survey reports that morale in the Eurozone’s largest economy continued to deteriorate in September, the euro is likely to face pressure.
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