GBP-EUR Exchange Rate Remains Above Key 1.15 Handle for Much of May
The European Central Bank (ECB) eased the pace of its interest rate hikes on 4 May but pointed towards more tightening soon in what investors expect to be the final round of its fight against inflation.
The announcement dented the euro slightly, but it was interest rate expectations on the other side of the English Channel that gave the GBP-EUR pair the biggest boost – with the Bank of England (BoE) hotly tipped to deliver a 25bps rate hike in May to dampen double-digit inflation.
On the eve of the BoE’s interest rate announcement, the pound rose to a five-month high against the euro as investors bet another hike would not be the last. The UK currency couldn’t cling onto its gains, however, after the central bank continued its most aggressive rate-hiking cycle since the 1980s.
Andrew Bailey was to blame for sapping the pound’s strength after his accompanying statement caused a U-turn in monetary policy expectations. The BoE Governor said he expects inflation to cool sharply, which would negate the need for further rate hikes.
Having rallied to a six-day high against the euro on the back of softer Eurozone inflation data and a more hawkish tone from Mr Bailey, the pound drifted lower after data showed a rise in the UK unemployment rate – potentially taking some of the pressure off the BoE to raise borrowing costs.
The GBP-EUR pair entered a period of relative calm in mid-May, remaining rangebound above 1.15 amid hawkish ECB comments, the IMF’s upgraded growth forecasts for the UK, and contrasting services PMIs – with the UK data underwhelming and the Eurozone figures coming in stronger than expected.
The pound managed to gain some traction on 24 May following the release of the latest CPI print from the UK economy, which revealed core inflation rose by 6.8%, up from 6.2% in March – a shock rise that heaped pressure in the BoE to hike rates in June. The GBP-EUR pair remained firm in the wake of news that the German economy has entered a technical recession.
Higher-than-expected retail sales data gave the pound another lift ahead of the bank holiday. UK shoppers showed their resilience in April as they weathered high inflation and rates, causing retail sales volumes to rise at their fastest pace in nearly two years – giving the BoE more wiggle room for further rate hikes.
The GBP-EUR pair continued to traverse the 1.15 range as May drew to a close – a month that has seen it rise in value by over 2%.
Stubbornly high inflation has prompted investors to pile on bets that the BoE will be forced to raise interest rates on 22 June – and beyond. With inflation proving stickier than expected, it appears all but certain that the UK central bank will hike rates from 4.50% to 4.75% in June.
Influential data from the UK economy in June: ILO unemployment rate (13 June), CPI (14 June), services PMI (23 June), GDP (30 June).
High inflation statistics and poor growth numbers from the EU – particularly Germany – remain problematic for the euro. This brings a raft of German data, European inflation figures for April on 1 June, and the latest ECB monetary policy decision on 15 June into sharp focus for investors in the single currency.
Foreign exchange analysts at Goldman Sachs have suggested that the euro could continue its downward trend against the pound in the near term in the face of mounting inflationary pressures.