GBP/EUR exchange rate week review: pound drops to 1.16 after dovish rhetoric boosts odds of June rate cut

(15/04/2024 to 19/04/2024)

Monday

The pound euro (GBP/EUR) exchange rate wavered near a four-week high above 1.17.

Comments from the European Central Bank’s (ECB) Chief Economist, Philip Lane weighed on the single currency.

Following the ECB’s dovish pivot during last week’s sixth consecutive interest rate hold, Lane doubled down on the central bank’s data-driven approach and displayed confidence that its 2% target inflation rate is being steadily reached.

Upbeat industrial production data from the Eurozone that indicated a marginal recovery year on year in February was overshadowed by ramped up interest rate cut bets.

Tuesday

The pound was rangebound against the euro despite notable economic data prints from the UK and Eurozone economies.

Investors in the pound appeared sanguine following the release of underwhelming UK jobs data. The number of people out of work rose by more than expected in February, with the unemployment rate increasing to 4.2% from 3.9% in January, well above the 4% expected by economists.

Dovish rhetoric from Bank of England (BoE) Governor Andrew Bailey tested the pound further. Addressing the IMF (International Monetary Fund), Bailey said there’s mounting evidence that inflation is falling and that the question for BoE rate-setters remained how much more evidence was needed before starting to cut interest rates.

Brightening morale in the German economy – the largest in the bloc – propped up the euro. The ZEW economic sentiment index rose to 42.9 points in April from 31.7 points in March, increasing more than expected and reaching the highest level since March 2022.

Wednesday

The pound euro rate continued to meander through the 1.17 range despite cooling consumer prices. CPI data showed UK inflation eased less than expected, dampening expectations of multiple UK interest rate cuts this year.

Consumer prices in the UK fell to 3.2% in March from 3.4% in February – marking inflation’s lowest level since September 2021. However, a set of higher-than-expected numbers prompted investors to scale back bets on the timing of the first BoE rate cut, which lent the pound some support.

They are now pricing in just one interest rate cut into the market this year, compared to forecasts for five in January.

The euro was undermined by ECB policy divergence with the US Federal Reserve, which doesn’t appear to be in a rush to cut interest rates this year. In contrast, ECB President Christine Lagarde gave the clearest indication yet that the central bank is on course to start cutting interest rates soon, with investors continuing to bet on June as the launchpad.

Speaking during the International Monetary Fund’s (IMF) spring meetings, she said: “We just need to build a bit more confidence in this disinflationary process but if it moves according to our expectations, if we don’t have a major shock in development, we are heading towards a moment where we have to moderate the restrictive monetary policy.”

Thursday

The pound euro rate neared a 10-day low in the 1.16 range amid a data lull and renewed expectations of interest rate cuts from the BoE.

Despite Wednesday’s sticky inflation print, which prompted markets to expect a single cut from the central bank this year, dovish commentary served to reframe this expectation, bringing a June interest rate cut back into the discussion.

The euro’s upside was capped by further dovish guidance from the ECB. Coming on the back of the central bank’s recent rate hold, senior policymakers have signposted the likelihood of interest rate cuts this summer.

This was echoed by Vice President Luis de Guindos, who reinforced speculation of an interest rate cut in June.

He commented: “I think that we have been crystal clear: if things continue as they have been evolving lately, in June we'll be ready to reduce the restriction of our monetary policy stance.”

Friday

The pound lacked a clear direction following the release of data showing British retail sales unexpectedly stagnated in March.

The quantity of goods bought in Britain flatlined between February and March following a revised 0.1% increase. The zero growth meant forecasts for a 0.3% expansion were missed but represented an improvement on the contraction recorded for most of last year.

The lacklustre reading could spur the BoE to begin lowering interest rates soon. This dovish outlook was reinforced by the central bank’s deputy governor Dave Ramsden who said UK inflation could hold around its 2% target for the next three years.

His comments suggested he does not need much more evidence of consumer prices falling before backing policy loosening. This soured pound sentiment, causing it to fall to within a whisker of the 1.16 benchmark.

The euro was muted despite Germany’s latest producer price index (PPI) falling less than forecast. Producer prices in Germany observed an annual decrease of 2.9% in March, missing market expectations of a 4% decline.

Looking ahead

Tuesday’s UK PMIs for manufacturing and services will indicate how the economy’s recovery is progressing having slipped into a recession at the end of last year. Both sectors are forecast to display a marginal contraction, which could sap pound sentiment.

Conversely, PMI prints from the Eurozone and German economies on Tuesday are expected to show their respective manufacturing and services sectors expanded in April.