GBP-EUR Exchange rate hits multi-month high above 1.19
The pound euro exchange rate traded near a three-week low around 1.177 on 1 July following the first stage of France’s general election. The results confirmed that support for the National Rally (RN) party was weaker than most polls had predicted, boosting the euro as fears of a majority right-wing government eased.
The pound was rangebound just above 1.18 on 5 July following the widely anticipated landslide UK election victory for the Labour Party, which had been priced into markets.
The pound euro rate remained trapped in a narrow range above 1.18 on 8 July following the second round of voting in the French election. The results confirmed that no party had won a majority, with the left-wing alliance Nouveau Front Populaire (NFP) pushing Marine Le Pen’s RN party into third place. The prospect of a hung government or a coalition was tempered by relief that RN can’t pursue its unsustainable fiscal policies, which helped to limit the euro’s downside.
A data lull on both sides left the pair listless until the pound edged above 1.19 on 12 July, hitting a multi-month high against the euro. The single currency was hampered by diverging political climates on either side of the English Channel. In the UK, Labour’s majority win provided stability, while in France a potential hung parliament had the opposite impact.
The pound euro rate neared a two-year high above 1.19 on 17 July amid stubborn UK inflation. The consumer price index for June came in slightly above forecast, printing at 2%, rather than cooling to 1.9% as forecast. This led markets to reduce their Bank of England (BoE) interest rate cut expectations, which bolstered the UK currency.
The pair was largely muted following the European Central Bank’s (ECB) decision to hold interest rates on 18 July. Talks of persistent inflation kept the euro afloat, with officials hinting that its policy may need to remain restrictive for longer than anticipated. Meanwhile, the pound was undermined by UK labour data that revived BoE rate cut bets. Unemployment remained at 4.4% in June, while average earnings (excluding bonuses) fell from 6% to 5.7% – the lowest reading in almost two years.
The pound euro rate dropped to a weekly low in the 1.18 mid-range the following day amid a larger-than-expected decline in UK retail sales.
Uneven PMIs pushed the pair up to near an 11-month high a fraction above 1.19 on 24 July. In the UK the services and manufacturing sectors recorded growth, while in the Eurozone the indices for both sectors came in below forecast in July, undermining the single currency.
The pound edged lower against the euro on 25 July following lacklustre data from the Confederation of British Industry (CBI), with the latest industrial trends orders and business optimism index printing below expectations.
The pound was undermined on 29 July ahead of Chancellor Rachel Reeves update on the state of the UK’s public finances amid reports of a £20bn black hole, causing it to fall to around 1.182.
The UK currency recouped its losses the following day after the Chancellor ruled out any new tax plans to plug the gap in public finances ahead of the Autumn budget. This helped the pound to firm to around 1.188 against the euro. Meanwhile, the single currency was muted despite encouraging GDP figures that showed the Eurozone’s economy grew by more than expected between April and June.
The pound euro exchange rate ended the month on the back foot following a shock rise in Eurozone inflation, causing it to dip into the 1.18 mid-range. The single currency was bolstered by data showing headline and core inflation printed hotter-than-expected in July, moving further away from the ECB’s 2% target. This served to dampen bets on the central bank cutting interest rates again in September.
GBPEUR: 3-Month Chart
Looking ahead
Economists were split about whether the BoE would trigger its rate-cutting cycle on 1 August after holding the Bank Rate at 5.25% since last August to cool red-hot inflation, which has come back under control.
Influential data from the UK economy in August: ILO Unemployment Rate (13 August), Consumer Price Index (14 August), Gross Domestic Product (15 August), Retail Sales (16 August), S&P Global/CIPS Composite PMI (23 August).
The next ECB policy decision will be announced on 12 September, with the chances of another cut wide open after the central bank downgraded its view of the Eurozone’s economic prospects and predicted that inflation would keep falling.