GBP-EUR Exchange rate touches 14-week high in May
The pound euro exchange rate was flat at the start of May amid underwhelming Eurozone PMI data and robust employment figures from the bloc.
On 7 May the pair hit a 13-day low around 1.162 following mixed Eurozone releases. An unexpected decline in German factory orders applied initial pressure to the euro, before its fall was cushioned by rising German exports and better-than-forecast retail sales throughout the bloc.
The pound struck a two-week low against the euro a whisker above 1.16 the following day after better-than-expected German industrial production figures gave the single currency a boost.
The pound euro rate was subdued after the Bank of England’s (BoE) latest interest rate decision on 9 May. While the central bank left borrowing costs on hold at 5.25% – a sixteen-year high – as expected, the accompanying report revealed an increasingly dovish vote. Two Monetary Policy Committee members voted for a cut, which could be a sign of imminent policy loosening.
Having climbed fractionally higher against the euro, an underwhelming UK jobs report created further headwinds for the pound on 14 May. Unemployment increased in March, rising from 4.2% to 4.3%, an eight-month high. The figures stoked market speculation that the BoE will cut interest rates in June, a dovish view that sapped pound sentiment.
The pound euro pair traded near an eight-day high in the 1.16 mid-range on 16 May, before ticking up to 1.168 as European Central Bank (ECB) policymakers continued to discuss a June rate cut, undermining the euro.
The pound held steady at a two-week high just below the 1.17 benchmark on 20 May, having firmed despite dovish rhetoric from BoE Deputy Governor Ben Broadbent, who said: “it’s possible the Bank Rate could be cut sometime over the summer.”
The UK currency had a three-week high in its sights after Germany’s latest PPI undermined euro sentiment. April’s PPI showed German producer prices fell more than expected, posting a 10th consecutive month of declining prices. The data indicated that inflation in the Eurozone’s largest economy will continue cooling, adding to calls for the ECB to cut interest rates in June.
Hotter-than-expected UK inflation data buoyed the pound on 22 May after the figures muted hopes of a June interest rate cut. Despite easing to its lowest level for almost three years, inflation cooled less than expected, leaving it further above the BoE’s 2% target than forecast. The pair touched a fourteen-week high in the 1.17 mid-range later in the day after UK Prime Minister, Rishi Sunak’s shock announcement of a general election on 4 July.
The pound euro exchange rate touched a fresh three-and-a-half month high around 1.175 the following day, before retreating after the UK’s service sector PMI printed a six-month low of 52.9. The figures suggest that service sector inflation is easing. If this is corroborated, the BoE may be able to cut interest rates this summer, a prospect that undermined the pound.
Falling UK retail sales pressured the UK currency on 24 May. Sales fell much more than expected in April as wet weather deterred shoppers from the high street. The volume of goods bought fell 2.3% between March and April following a mild contraction in the previous month. Economists had forecast a 0.4% decline.
The pound was subdued near a multi-month high on 28 May, despite robust UK retail data for May, before retreating to 1.174. Sales surged according to the closely watched Distributive Trades Survey from the Confederation of British Industry, as selling price inflation continued to recede.
The euro struggled for support on 30 May, despite an upbeat jobs report that dampened ECB interest rate cut speculation. In April, unemployment dipped to a historic low of 6.4% throughout the Eurozone. With employment levels appearing robust in the single currency area, the ECB might have the additional room needed to keep rates on hold.
GBPEUR: 3-Month Chart
Looking ahead
While April saw a big drop in the UK’s headline rate of inflation, it did not cool as much as many had forecast. Consequently, most experts are now ruling out an interest rate cut by the BoE at its next policy meeting on 20 June – a hawkish stance that would support the pound. Despite this, the central bank’s rate rhetoric has gradually been getting more dovish in recent weeks.
Influential data from the UK economy in June: ILO Unemployment Rate (11 June), Consumer Price Index (19 June), Retail Sales (21 June), S&P Global/CIPS Services PMI (25 June), GDP (28 June).
The ECB has all but promised an interest rate cut at its next policy meeting on 6 June, which might apply limited downward pressure to the euro having been priced into the market. This has shifted the debate to subsequent moves, with investors currently betting on just one more cut this year, which could help to cap any euro losses.