The pound euro exchange rate traded in a wide range this week amid speculation over how quickly the Bank of England (BoE) and European Central Bank (ECB) will lower interest rates.
Euro pressured by ECB rate cut remarks
The pound euro exchange rate initially faltered this week. Sterling was pressured by bets for consecutive rate cuts from the BoE in November and December. While the single currency was supported by a rebound in Eurozone retail sales.
GBP/EUR was quick to bounce back from its worse levels, as the euro was undermined by dovish remarks from ECB policymaker Mārtiņš Kazāks.
This dovish sentiment was reinforced by the ECB’s François Villeroy de Galhau on Wednesday, after he suggested ‘decrease in interest rates is very likely’ at the bank’s next meeting.
At the same time, the pound drew support from reports suggesting UK Chancellor Rachel Reeves will change the government’s debt rules to allow her to spend more in her upcoming budget.
However, these gains were tempered as subsequent reports suggested the government’s revenue-raising plans are in ‘complete disarray’.
The pound then closed the week on a positive note, after the UK’s latest GDP figures revealed Britain’s economy returned to growth in August.
ECB rate cut to weaken the euro?
Turning to next week, the ECB’s latest interest rate decision will likely act as the primary catalyst of movement for the GBP/EUR exchange rate.
The market consensus is that the ECB will deliver another 25bps rate cut when it concludes its October policy meeting on Thursday. A result which is likely to see the euro weaken.
However, some analysts believe there is the chance for a hawkish surprise next week, with the euro likely to rally if the ECB opts to leave rates on hold.
In the meantime, GBP investors will be kept on their toes with the publication of some high-impact UK economic data.
The UK’s latest inflation and wage growth figures will be the main focus, with the pound potentially giving some ground if cooling inflation and weakening wage growth are seen as placing more pressure on the BoE to cut rates.
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