The pound euro exchange rate struck its highest level since August 2022 this week as the Bank of England (BoE) opted to leave interest rates unchanged.

Pound strengthens on BoE-ECB divergence

Sterling got off to a positive start against the euro this week, as an upbeat market mood supported the risk-sensitive pound over the safe-haven single currency.

In addition, expectations that the Bank of England would diverge from the European Central Bank (ECB) by leaving interest rates unchanged this month also supported the UK currency.

GBP/EUR stumbled on Tuesday, with the euro rising despite a dire result from the latest German economic sentiment index. Morale in the Eurozone’s largest economy plunged to an 11-month low.

This was only a minor blip for the pound, with GBP rallying midweek as the UK’s consumer price index exceeded expectations. While headline inflation held steady, as expected, core inflation jumped from 3.3% to 3.6% and services inflation rose from 5.2% to 5.6%.

The CPI figures set the stage for the BoE decision on Thursday, where the bank held Bank Rate at its current level of 5%.

Sterling enjoyed further gains on Friday after UK retail sales for August beat forecasts. Sales grew 1% last month, above expectations of 0.4% and accelerating from July’s upwardly revised 0.7% growth.

However, after GBP/EUR hit a 25-month high, many investors decided to cash in on the pound’s strength. This profit-taking saw Sterling trim its gains.

Latest PMI surveys in focus

Next week’s session kicks off with September’s preliminary PMI surveys for both the UK and the Eurozone.

At the time of writing, forecasters expect to see sustained growth in the Eurozone services sector this month. However, if we see a dip in activity after the end of the Paris Olympics then EUR could struggle.

Meanwhile, the UK is set to see a slowdown in both manufacturing and services activity in September. If so, GBP may face selling pressure.

British data then thins out for the remainder of the week, meaning GBP/EUR may be primarily driven by Eurozone data and market risk appetite.

The Eurozone’s key releases are mostly from Germany, including the country’s latest business climate index, consumer confidence report, and unemployment data. If these releases reinforce fears that the bloc’s largest economy is continuing to struggle, the euro could lose ground.

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