GBP/EUR exchange rate week review: pound falls to 2-1/2-month low versus euro
13/01/2025 to 17/01/2025: The pound euro (GBP/EUR) exchange rate extended its losses amid concerns about further spending cuts and tax hikes as rising government borrowing costs battered the UK government.
Monday
The pound euro (GBP/EUR) exchange rate slipped to a fresh multi-month low around €1.187 as UK government borrowing costs continued to climb. This kept the prospect of public spending cuts or further tax rises in focus.
Despite dipping initially, the UK currency managed to trim most of its losses as bond yields began to ease.
The euro was undermined by its inverse relationship with a resurgent dollar. Also weighing on the single currency was an underwhelming report that revealed falling business confidence across the Eurozone.
Tuesday
A data lull on both sides left the pound euro exchange exposed to concerns about Britain's fiscal sustainability despite UK bond markets remaining relatively calm. Ongoing jitters about further spending cuts and tax hikes caused the pair to hit a fresh 2-1/2-month low in the 1.18 midrange.
The euro experienced modest support, this time benefitting from its negative correlation with the dollar, which withdrew from recent highs. However, an absence of economic data and improving risk appetite kept the single currency in check.
Wednesday
The pound firmed to a fraction below the €1.19 level following a surprise slowdown in UK inflation in December.
The CPI showed inflation eased to 2.5% after two months of rises. Economists had expected the figure to remain at 2.6%.
The slowdown in consumer prices prompted investors to raise bets on the likelihood of a Bank of England (BoE) interest rate cut next month, which could relieve the burden of surging government borrowing costs.
The euro was undermined by German GDP figures, which revealed the Eurozone’s largest economy contracted for a second year in a row in 2024. GDP dropped by 0.2% last year after declining by 0.3% in 2023. This marked only the second two-year contraction in the German economy since the 1950s, having contracted in 2002 and 2003.
The downward pressure on the single currency was compounded by European Central Bank (ECB) policymaker Francois Villeroy de Galhau, who suggested borrowing costs may need to reach 2% in a few months.
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Thursday
The pound stumbled against the euro after the UK’s latest GDP data fell short of economists’ forecasts, causing it to fall into the €1.18 midrange before trimming some of its losses.
Although the UK economy recovered in November after the Autumn Budget, economic growth recorded a paltry 0.1%, below forecasts for a 0.2% expansion. The weaker-than-expected growth raised the likelihood that the BoE will cut interest rates in February, denting the pound.
The euro was buoyed by a risk-off market mood, but its upside potential was limited by an uptick in the dollar and ECB rate cut speculation.
Friday
The pound euro exchange rate continued to falter after data showed UK retail sales plunged in December in the wake of the Autumn Budget fallout, despite expectations of a Christmas boost.
Sales volumes fell 0.3% in the final month of 2024, significantly undershooting expectations for growth of 0.4%. November’s retail sales growth was also revised down to just 0.1% from the previously recorded 0.2%.
Looking ahead
If, as expected, average earnings in the UK for December show signs of growth, the pound is likely to be given an uplift on Monday.
Manufacturing and services PMIs from both sides are scheduled for release on Friday. The print for the UK’s powerhouse services sector will be closely monitored by investors in the pound.