GBP-EUR Exchange Rate Achieves Marginal Gains Across July
Following a choppy start to the month, the increasingly risk-sensitive pound was buoyed by positive market mood and underwhelming Eurozone data – favourable conditions that left it just shy of 1.17 against the euro on 4 July, a 12-day high.
The GBP-EUR pair maintained its momentum, breaking through 1.17 – a 17-day high – on 6 July as expectations of further policy tightening from the Bank of England (BoE) gave the UK currency another shot in the arm. Any concerns of a ‘hard landing’ were overlooked amid a potential hike into a recession. Instead, investors took a sanguine view and bet on the pound in anticipation of rising interest rates.
The pound’s rate-fuelled rise was supported by stubborn UK inflation – raising bets on the BoE hiking interest rates by 50bps at the next meeting of its Monetary Policy Committee in August.
GBP-EUR briefly touched a near ten-month high on 11 July after UK wage growth printed at a record level. Average earnings rose 7.3% in the three months to May, equalling a previous record high and stoking rate hike bets. Meanwhile, the euro was dented by a more-than-expected decline in German economic sentiment.
The euro’s negative correlation with a declining dollar caused the GBP-EUR pair to tumble from its July peak before the pound rallied on news that Britain’s economy shrank by less than expected in May. Meanwhile, European industrial production data disappointed, heaping pressure on the euro.
The pair then waved goodbye to the 1.17 range, slipping lower despite a stronger-than-expected UK GDP print on 13 July.
The pound wavered against the euro ahead of consumer price data on both sides of the English Channel, before plunging to a near two-month low after UK inflation cooled more than forecast in June – leading investors to scale back their bets on further BoE interest rate rises.
The latest consumer price index showed that both headline and core inflation cooled in June, raising hopes that prices may finally be on a sustained path lower. While this is good for the economy, it’s bad news for the pound, which has benefitted from the BoE’s prolonged rate hiking cycle to combat inflation.
The pound managed to scrape itself off the floor of the 1.15 range on 20 July following the release of better-than-forecast retail sales data – with domestic UK sales growing 0.7% in June, surpassing expectations of 0.2%. Its modest recovery was capped, however, by dampened BoE interest rate hike bets after UK inflation came in softer than expected.
The GBP-EUR rate began to shift through the gears again following the release of Germany’s latest IFO index on 25 July, which stoked concerns the Eurozone’s largest economy may have remained in recession in the second quarter.
Meanwhile, the pound was supported by improving UK business morale. The Confederation of British Industry’s gauge of optimism turned positive for the first time in two years, with its index surging in the third quarter – propelling the pound back into the 1.16 range.
The pound remained firm ahead of the European Central Bank (ECB) policy announcement on 27 July. The ECB completed a full year of consecutive hikes by increasing its main rate by a quarter percentage point to 3.75% – a move that placed the euro under selling pressure.
“Inflation continues to decline but is still expected to remain too high for too long,” the ECB said in an accompanying statement.
GBPEUR: 3-Month Chart
Two more rate hikes are expected from the BoE, in August and September, with the Bank Rate forecast to peak at 5.5%, before rates start to be cut from the second half of next year.
Influential data from the UK economy in August: Gross Domestic Product (11 August), Claimant Count Change (15 August), ILO Unemployment Rate (15 August), Consumer Price Index (16 August), Retail Sales (18 August), S&P Global/CIPS Composite PMI (23 August).