GBP-EUR Exchange Rate Review: 2023
On balance, the pound has achieved upward momentum against the euro in 2023 despite a volatile period for the GBP-EUR pair.
The pound slumped to its lowest level of the year against the pound in February, falling below the 1.12 benchmark after the Bank of England (BoE) signalled that its policy tightening cycle could be paused.
Having recovered from this annual low, the UK currency maintained par against the euro in March after both benefitted from better-than-expected economic data.
The GBP-EUR pair trended lower in April amid deleterious factors like data showing the UK’s service and production sectors had contracted, and figures that stoked optimism around the ongoing recovery in Germany – the Eurozone’s largest economy.
The pound gained traction in May, rising to a five-month high against the euro on the eve of the BoE’s interest rate announcement, as investors bet another hike would not be the last – potentially extending its most aggressive rate-hiking cycle since the 1980s.
After rising in value by more than 2% against the euro in May, the pound maintained its momentum for much of June, briefly breaking through 1.17 to touch a nine-month high following upbeat UK GDP data and BoE rate hike expectations.
The GBP-EUR exchange rate surged into the 1.17 mid-range in July, marking an annual high after red-hot UK wage growth added fuel to market expectations of further rate hikes from the BoE.
A downbeat assessment of the UK economy from The National Institute of Economic and Social Research was compounded by the euro’s negative correlation with a strengthening dollar in mid-August – challenging conditions that caused the pound to crumble to a 10-week low against the euro just above the 1.15 benchmark on 11 August.
Despite rebounding into the 1.17 range towards the end of August amid contrasting interest expectations on both sides of the English Channel, volatility was the overarching theme for the pound.
The GBP-EUR rate dropped to a four-month low in September when BoE rate-setters voted to leave interest rates unchanged at 5.25% – marking a pause in its supportive monetary policy tightening cycle that began in December 2021.
After rallying, the pound sunk to a five-month low in the 1.14 mid-range in October in the wake of a lamentable retail sales print from the UK, which showed the cost-of-living crisis caused sales volumes in the UK to crash.
A surprise contraction in retail sales growth stoked UK recession fears in November, dragging the pound to within a whisker of the 1.14 level – a six-month low – before hawkish BoE rhetoric and robust data inspired a sharp recovery to a six-week high.
The upward momentum continued into December as the GBP-EUR pair broke through the 1.16 handle, hitting a 12-week high amid waning economic tailwinds in the bloc and softening UK inflation that prompted rate cut speculation.
The pound traversed the 1.16 range before plunging below 1.15 on 28 December as UK recession fears persisted and the ECB played down speculation about rate cuts in 2024.
The GBP-EUR exchange rate managed to rebound into the 1.15 range as the year ended – an upward movement that reflected its more than 2% gain in 2023.
GBPEUR: Year 2023 to Date
GBP – EUR 2024 Outlook
Interest rates
Investors in the pound will closely monitor any speculation the BoE could be forced to launch a deep round of interest rate cuts in 2024 against a backdrop of growing recessionary fears. Diverging opinions between the BoE and market analysts are clouding the outlook.
The central bank has pushed back against expectations for rate cuts. Andrew Bailey, its governor, said in November that it was “far too early to be thinking about rate cuts” and “much too early to declare victory” on inflation. Meanwhile, money markets recently priced in four quarter-point cuts to interest rates starting from the summer, anticipating the base rate would be slashed to as low as 4.25% by the end of 2024.
Inflation is falling back towards comfort levels for the European Central Bank (ECB), which is a key factor in mounting predictions for rates to be cut as early as March – a dovish course of action that could weigh on the euro.
General election
Prime minister Rishi Sunak could theoretically hold the next UK general as late as January 2025, maximising the Conservatives’ full five-year term. However, most pundits expect he will opt for a spring or autumn vote. According to a Bloomberg poll of investors, an expected Labour victory could support the pound. However, political uncertainty surrounding the vote may prompt volatility.