GBP/EUR exchange rate midweek update: pound dips as falling inflation stokes rate cut bets
Decline in consumer prices index print to more than two-year low adds to speculation of summer interest rate cut
(20/03/2024)
The GBP/EUR exchange rate was muted in the 1.16 range on Monday amid mixed data from the Eurozone.
News that inflation is notably cooling closer to the European Central Bank’s (ECB) 2% target didn’t take anyone by surprise. It did reinforce bets on interest rate cuts before summer, which likely pressured the euro.
The single currency didn’t receive any respite from the latest trade data, which printed below forecasts for January.
The absence of influential data from the UK economy brought this week’s interest rate decision from the Bank of England (BoE) into even sharper focus. With the key rate expected to remain on hold, the central bank’s forward guidance on the timing of cuts was at the forefront of investor attention.
The pound remained rangebound against the euro on Tuesday following the release of Germany’s latest economic sentiment index, which smashed expectations – climbing to its highest levels in over two years. However, the figures were released against a backdrop of stagnation in the Eurozone’s largest economy.
UK inflation cooled more than forecast in February to 3.4% – the lowest level in almost two and a half years – keeping potential summer interest rate cuts on track. Wednesday’s numbers hit the headlines a day before the BoE’s March meeting of rate-setters. The pound wavered a fraction above 1.17 following the print.
The euro was trapped in a narrow range, following a speech from ECB President Christine Lagarde. While she kept investors guessing about the path beyond the first cut, she signalled that one was on the horizon amid slowing wage growth and cooling inflation.
Looking ahead
The BoE announces its latest interest rate decision on Thursday. Investors will monitor the accompanying commentary to see if Wednesday’s inflation data will prompt dovish rate rhetoric – any indication of looser policy could weigh on the pound.
For the euro, the latest Eurozone preliminary PMIs land on Thursday. If, as forecast, activity in both the services and manufacturing sectors improves in March, the single currency could strengthen.