GBP/EUR exchange rate February review: pound hits eighteen-month high against euro
Robust UK employment data lifted the GBP/EUR exchange rate to an eighteen-month high in February, before static inflation, dire GDP numbers and hawkish ECB comments eroded its gains.
The Bank of England's (BoE) decision to maintain its interest rate at a sixteen-year high of 5.25% on 1 February was accompanied by mixed commentary from central bank policymakers, injecting volatility into the GBP/EUR currency pair.
An unexpected rise in German factory orders bolstered the euro on 6 February, causing the pound to dip to a seven-day low in the 1.16 mid-range. The single currency's gains were tempered by a larger-than-expected decline in Eurozone retail sales in December and increased risk appetite.
The GBP/EUR exchange rate was reinvigorated the following day after declining German industrial production data dented the euro – causing the pound to rise above 1.17.
Speeches from BoE officials failed to alter the pound's subsequent sideways trajectory, despite their hawkish signals.
Robust UK employment data sparked life into the UK currency on 13 February, lifting it to an eighteen-month high against the euro in the 1.17 mid-range. This was fuelled by lower-than-expected unemployment figures for December and average UK earnings (including bonuses) that slowed less than anticipated – adding weight to the BoE's cautious monetary policy stance.
The pair recoiled from its multi-month high the next day amid cooler-than-expected UK inflation. News that headline inflation unexpectedly held at 4%, rather than warming to 4.2% as predicted, stoked speculation about a potential BoE interest rate cut.
By February 15, the pound had tumbled to a nine-day low following GDP data that confirmed the UK economy slipped into a technical recession in 2023. This fall was cushioned by upbeat UK retail data, causing the GBP/EUR exchange rate to trend sideways.
The pound dropped to a five-day low near the 1.16 mid-range on 20 February after a data drought left investors recalling the disastrous GDP figures and cooler-than-anticipated inflation report.
The pound to euro exchange rate recovered to hit a nine-day high above 1.17 on 23 February amid renewed concerns about Germany’s economic contraction. GDP data showed that the Eurozone’s largest economy shrank by 0.3% during the last three months of 2023.
Hawkish comments by European Central Bank (ECB) President Christine Lagarde, which sidestepped the timing of rate cuts, boosted the euro on 26 February – raising investor bets that the central bank will keep interest rates on hold for longer.
The GBP/USD currency pair traded in a narrow range as February wrapped up, meandering just below 1.17 as the pound and euro both struggled to gain traction. Cooler-than-expected food inflation data from the UK was tempered by German economic anxieties on 27 February. It was a similar story the following two days when a UK data lull was met by an unexpected decline in the bloc’s economic sentiment index and a series of underwhelming German economic data releases.
The pound/euro exchange rate closed out February at 1.168.
Looking ahead
The BoE's February monetary policy statement hinted that a rate cut may be some way off, cooling expectations for policy loosening in March.
The ECB may consider rate cuts as early as June, with money markets indicating less than a 50% chance of such action in April. The next meeting of ECB rate-setters is scheduled for March 7.