Pound euro (GBP/EUR) exchange rate soars amid central bank divergence

Pound euro (GBP/EUR) exchange rate jumps as US data shakes up markets

(Updated 16:40, 07/06/24) The pound euro (GBP/EUR) exchange rate leapt to a nine-day high today as the latest US non-farm payrolls report rippled out through global markets.

In May, the US economy added 272,000 jobs – significantly exceeding the expected figure of 185,000. The odds for a July interest rate cut from the Federal Reserve fell from 20% to around 8%, sending the US dollar (USD) skyward.

This sudden appreciation in USD weighed on the euro (EUR), due to the single currency’s negative correlation with the American ‘greenback’.

In addition, the adjusted Fed rate cut bets increased the potential for a widening monetary policy divergence between the European Central Bank (ECB), the Fed, and the Bank of England (BoE).

Although the ECB struck a relatively hawkish tone at its policy decision on Thursday, the bank still cut interest rates. The Federal Reserve, on the other hand, is now expected to leave rates untouched until at least September.

With the Fed likely to delay cutting rates, the BoE may opt to do the same. Markets have already virtually ruled out a BoE rate cut this month due to recent hotter-than-forecast UK inflation data and the upcoming general election.

With the ECB now looking like a clear outlier compared to the BoE and the Fed, the pound (GBP) was able to surge against the euro.

At the time of writing, GBP/EUR is trading at around €1.1773, up over 0.2% on the day and just shy of a 21-month high touched last Wednesday.

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Pound euro (GBP/EUR) exchange rate quiet following ECB’s hawkish cut

The pound euro (GBP/EUR) exchange rate is wavering sideways so far today in the wake of the European Central Bank’s (ECB) interest rate decision yesterday and downbeat German data this morning.

At the time of writing, GBP/EUR is at around €1.1744, virtually unchanged from this morning’s opening level.

Pound (GBP) subdued amid lack of UK data

The pound (GBP) is muted today as an ongoing lack of British economic data keeps Sterling subdued.

In addition, a mixed market mood is adding to the increasingly risk-sensitive pound’s unclear direction. While markets are somewhat hopeful that the global economy is improving and many central banks are starting to cut interest rates, there are fears that the crisis in the Middle East is on the brink of escalation.

Meanwhile, in the absence of UK economic data, some investors may be eyeing the country’s political landscape. Britons will head to the ballot box for a general election on 4 July, and the main parties have started outlining their policy plans.

However, many thinktanks and economists have warned that the two main parties – Labour and Conservatives – are not being honest about the scale of the challenge facing the next government. Many are warning that the UK will inevitably face cuts to public spending and tax rises.

Euro (EUR) stalls as German data disappoints

Meanwhile, the euro (EUR) is struggling to push higher against the pound today, with the currency failing so far to build on its gains following yesterday’s European Central Bank decision.

The ECB cut interest rates for the first time in eight years but pushed back on expectations for more cuts in the coming months. The bank said that rates will remain ‘sufficiently restrictive’ to bring inflation back down, dampening further rate cut bets.

While this is underpinning the single currency today, some weak German data may be stifling EUR’s potential.

Industrial production in Germany unexpectedly shrank by 0.1% in April. Analysts had predicted a 0.3% rise in production, following March’s 0.4% contraction.

The latest data is yet another indication that the Eurozone’s largest economy continues to face headwinds as it struggles to recover strength in the wake of the Covid pandemic and Russia’s invasion of Ukraine.

These concerns seem to have put a lid on the euro.

Pound euro exchange rate forecast: ECB Lagarde speech to impact EUR?

Looking ahead, a speech from ECB President Christine Lagarde this afternoon could impact the euro. If the central bank chief reiterates her commitment to bringing inflation down to the target rate, indicating that interest rates may need to remain higher for longer, EUR could end the week on a positive note.

However, if Lagarde gives any indication that she thinks the recent acceleration in inflation was merely a bump in the road, EUR could struggle.

Elsewhere, market risk dynamics could influence the currency pairing. If sentiment sours, the increasingly risk-sensitive pound could soften against the safer single currency.

Next week we have some high-impact UK data that could influence the pound. If we see signs of a slowdown in the latest labour market report, Sterling could weaken. April’s GDP figure is then due on Wednesday. With growth forecast to come in at a meagre 0.2%, will this be enough to support the pound?

Samuel Birnie

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