GBP/EUR exchange rate supported by hawkish BoE interest rate cut in August
The pound tumbled around 1% into the 1.14 mid-range against the euro on 1 August, after the single currency was bolstered by its inverse relationship with a softening dollar.
The pound edged above the 1.15 benchmark on 5 August after the UK’s final services PMI for July was revised up and the Eurozone’s was revised down.
Having fallen back into the 1.14 mid-range on 7 August, the pound rebounded above 1.15 after the Bank of England (BoE) voted to cut interest rates by narrow 5-4 vote – a hawkish tilt that prompted markets to scale back expectations for future cuts.
The pound briefly jumped to within touching distance of the 1.16 level on 12 August after UK jobs data came in stronger than anticipated, further dampening BoE rate cut expectations. However, the UK currency’s gains were capped by euro strength following a steep decline in the dollar.
The pound broke through the 1.16 resistance level on 14 August after the UK’s GDP figures for the second quarter surpassed expectations. Meanwhile, the euro softened amid investor jitters ahead of discussions on Ukraine between Donald Trump and Vladimir Putin.
The pound euro exchange rate retreated into the 1.15 range the following day as a round of profit-taking led investors to cash in on the UK currency’s recent gains.
Following a period of relative calm, the pound softened against the euro on 20 August as investors grew concerned that high borrowing costs might lead to government tax hikes this year. The move lower came despite an above forecast UK inflation print that further eased expectations for BoE rate cuts.
The UK currency continued to slip against the safer euro on 22 August following a sharp decline in the dollar that offset the impact of heightened Russia-Ukraine tensions on the single currency.
The pound pushed towards 1.16 on 27 August following an uptick in the UK producer price index (PPI) for the second quarter. Signs of persistent inflationary pressures further fuelled expectations that the BoE may resist lowering interest rates again soon, boosting the UK currency. Meanwhile, the euro was dented by a sharper-than-expected decline in Germany’s consumer confidence index for September.
The pound softened versus the euro the following day amid a lack of UK data and ongoing concerns around the potential for tax hikes in the autumn budget. The euro shrugged off lacklustre Eurozone data as the dollar retreated.
The ongoing UK data lull meant the UK currency continued to pull back on 29 August. Meanwhile, the euro was buoyed by an uptick in German inflation that diminished the case for an ECB rate cut in September.
The pound euro exchange rate ended the month at around 1.155.
GBPEUR: 3-Month Chart
Looking ahead
The BoE’s next interest rate decision is scheduled for 18 September. With UK inflation currently at 3.6% and forecasted to reach 4% in September, a cut is considered unlikely.
Influential data from the UK economy in September: Retail Sales (5 September), Claimant Count Change (16 September), Employment Change (16 September), ILO Unemployment Rate (16 September), Consumer Price Index (17 September), Retail Sales (19 September), S&P Global Manufacturing PMI (23 September), S&P Global Services PMI (23 September), S&P Global Composite PMI (23 September), Gross Domestic Product (30 September).
The European Central Bank (ECB) is expected to keep interest rates on hold on 11 September, but discussions about further cuts may resume if the economy weakens. The ECB left its key rate at 2% in July, bringing the curtain down on a year-long cutting cycle and prompting investors to bet on a prolonged pause.