GBP/EUR exchange rate week review: pound shrugs off cooling UK inflation
The pound remained resilient amid a cooling Consumer Price Index and dovish central bank commentary, as services inflation remains sticky.
(17/06/2024 to 21/06/2024)
Monday
The pound euro (GBP/EUR) exchange rate dipped towards 1.18 despite political uncertainty in France, as a risk-off market mood took its toll ahead of influential domestic data.
Ongoing worries over France’s snap election at the end of June generated headwinds for the euro. Investors in the single currency are concerned that President Emmanuel Macron’s decision to call a vote might backfire, providing the far-right National Rally party with a platform to block his economic reforms.
The pound was undermined by a lack of UK macroeconomic data amid investor risk aversion.
Tuesday
An underwhelming German ZEW economic sentiment index, which fell short of forecasts, failed to lift the pound euro rate.
Economic morale in the Eurozone’s largest economy ticked up in June but came in well below expectations – a sign of stagnating sentiment that served to undermine the single currency.
Cooling UK grocery inflation, which dropped for the 16th consecutive month, put a lid on the pound’s potential.
Wednesday
The pound euro exchange rate recovered to the 1.18 mid-range despite the publication of the latest UK Consumer Price Index, which showed UK inflation hit the Bank of England’s (BoE) 2% target for the first time in three years.
The UK’s CPI for May showed headline inflation dropped to 2%, down from 2.3% in April, while core inflation cooled from 3.9% to 3.5%.
However, hotter-than-expected services inflation last month underscored the threat of second-round inflationary pressures. This dampened BoE rate cut expectations, which lifted the UK currency.
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Thursday
The pound traded sideways versus the euro following the BoE’s June interest rate decision, which saw it enact a widely anticipated hold in borrowing costs accompanied by some dovish forward guidance.
This, alongside news of cooling inflation, rekindled BoE rate cut speculation, suppressing the pound, which treaded water around 1.182.
Speaking after the interest rate announcement, BoE governor, Andrew Bailey said: “It’s good news that inflation has returned to our 2% target. We need to be sure that inflation will stay low and that’s why we’ve decided to hold rates at 5.25% for now.”
Meanwhile, two sets of downbeat economic data weighed on the euro: confirmation that the German PPI cooled to its lowest level in 11 months was followed by the Eurozone’s preliminary consumer confidence index for June which printed marginally below forecast.
Friday
The pound euro exchange rate was muted following the publication of the UK’s and the Eurozone’s latest PMIs.
An impressive jump in UK retail sales helped to offset news that British businesses are expanding at the slowest pace since the economy was in recession last year.
Cooling inflation, improving consumer confidence and better weather saw spending in shops and online rebound strongly in May. The volume of retail sales rose by 2.9% following a weather-induced drop of 1.8% in April.
Meanwhile, the S&P Global Composite Purchasing Managers' Index fell to 51.7 in June from 53.0 in May, its lowest print since November 2023 and below economists’ forecasts.
The single currency was also undermined by the composite PMI for the Eurozone which fell sharply to 50.8 from 52.2, reflecting a large drop in German manufacturing activity and French business activity ahead of an election the far-right is forecast to do well at.
The pound euro exchange rate settled at 1.182 as the week ended.
Looking ahead
The primary catalyst for movement for the euro at the start of next week will likely be Germany’s latest IFO business climate for June. Any uptick in the index could lend the single currency support.
A data-light week in the UK means investors in the pound must wait until Friday when the latest GDP print for the first quarter hits the headlines, which is forecast to remain unchanged.
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