GBP/EUR exchange rate rebounds from 5-week low in May
The pound euro exchange rate drifted lower during the first week of May after the Labour Party suffered significant losses in the local elections, heaping pressure on Keir Starmer’s premiership. Meanwhile, the euro was bolstered by its strong inverse relationship with a declining dollar.
The pair fell to within a whisker of the 1.15 level on 11 May amid ongoing uncertainty surrounding Starmer’s future as Prime Minister, despite his insistence he would remain in office. Reports suggesting several Labour MPs want him replaced at Number 10 weighed heavily on the pound.
Having firmed into the 1.15 mid-range, the pound slumped more than half a per cent against the euro on 14 May to around 1.148. Speculation over whether the Prime Minister could resign following the departure of Health Secretary Wes Streeting eclipsed stronger-than-expected UK GDP data.
The pound euro exchange rate slid to a five-week low around 1.146 the following day as persistent political uncertainty continued to deter investors from the UK currency. This followed mounting speculation that Greater Manchester Mayor Andy Burnham could seek a return to parliament to challenge Keir Starmer.
The pound rebounded above the 1.15 benchmark against the euro on 18 May, reversing its losses from the previous week. Sentiment towards the UK currency improved markedly as investors grew less anxious about the UK’s political uncertainty. This positive sentiment was bolstered by the IMF, which raised its UK growth forecast for this year.
The pound continued to edge higher the following day, despite data showing the UK unemployment rate unexpectedly increased in the three months to March, while wage growth cooled. However, the UK currency was cushioned by official figures showing employment rose by a stronger-than-forecast rate.
It was a similar story on 20 May when investors looked past a weaker-than-expected UK consumer price index, allowing the pound to continue ticking higher against the euro. Headline inflation cooled from 3.3% to 2.8% in April, but the reading had little impact on Bank of England (BoE) interest rate hike expectations.
The pound euro exchange rate hit a ten-day best on 22 May as falling UK bond yields helped to offset underwhelming domestic retail sales figures.
The pound retreated against the euro on 26 May, despite stronger-than-forecast Confederation of British Industry (CBI) data for May. While the CBI’s retail sales balance improved by more than expected, it remained firmly in negative territory.
The pound euro rate continued to soften the following day after the single currency was supported by European Central Bank (ECB) interest rate hike bets. The ECB’s latest Financial Stability Review indicated that ongoing inflation pressures could lead to tighter monetary policy, increasing expectations of at least two rate rises over the next year.
The pound euro exchange rate ended the month around 1.154.
GBPEUR: 3-Month Chart
Looking Ahead
Influential data from the UK economy in June: Consumer Price Index (17 June), Claimant Count Change (18 June), Employment Change (18 June), ILO Unemployment Rate (18 June), Retail Sales (19 June), S&P Global Composite PMI (23 June), GDP (30 June).