Pound euro (GBP/EUR) exchange rate spikes to 23-day high

GBP/EUR exchange rate boosted by strong UK PMI data

The pound euro (GBP/EUR) exchange rate is trending higher today, extending a week-long trajectory as hawkish hopes for the Bank of England (BoE) buoy the pound (GBP). Also supporting Sterling today is Thursday’s upbeat PMI data.

At the time of writing, GBP/EUR is trading at €1.1803, having climbed by almost 0.2% in the past 24 hours.

Pound (GBP) climbs ahead of Bailey speech

The pound is firming against its peers as the week draws to a close, despite some uncertainty regarding Andrew Bailey’s likely comments this afternoon. On the whole, markets expect the BoE Governor to strike a hawkish tone: the UK’s central bank is expected to ease monetary policy at a slower pace than its international counterparts.

Lending support to GBP in the meantime are lingering tailwinds following yesterday’s PMI release. Both manufacturing and service-sector data printed above forecasts, demonstrating strong expansion in business activity.

Commenting upon the release, Kyle Chapman, FX Markets Analyst at Ballinger Group, said:

‘This is a goldilocks report for the Bank of England and the ECB is looking on in envy, with economic expansion in a sweet spot and inflationary pressures waning.’

Moreover, US dollar (USD) weakness as markets wait to hear the Federal Reserve’s stance on inflation has diverted investment to the UK currency. The pound is not entirely out of the woods, however.

The BoE is still expected to cut interest rates once more before the end of the year, leaving traders to speculate about when the move might be actioned; some analysts are even suggesting that market forecasts are too bullish.

Edinburgh-based Abrdn Investment Management Ltd. predicts that the Bank of England will deliver deeper interest-rate cuts than markets expect: traders are currently pricing the BoE’s terminal rate around 3.5%, but investment director Matt Amis suggests ‘the BOE is mispriced versus the Fed and the ECB.’

Euro (EUR) subdued as markets expect interest rate cut

The euro (EUR) is struggling to climb against its peers today as markets anticipate a possible September interest rate cut from the European Central Bank (ECB).

Uncertainty over the economic outlook in the Eurozone is prompting bearish sentiment: yesterday’s PMIs reinforced the impression that business activity is stalling across the bloc, as the majority of the data disappointed.

In Germany, the Eurozone’s largest economy, both manufacturing and service sector activity slid lower, with the manufacturing sector remaining in contraction territory. Manufacturing in the wider Euro area also contracted further, but an unexpected increase in service-sector expansion helped cap EUR losses.

Analysts suggest that improvement in services growth was likely a result of the Paris Olympics: France’s own services PMI hit a 27-month high of 55.0 this month.

August’s silver lining cannot erase the pressure facing the economy, however. Kallum Pickering, chief economist at Peel Hunt, confirms that ‘Germany’s export-and-production-oriented economy continued to struggle’ this month, ‘as domestic consumer softness and geopolitical uncertainties hurt sentiment.’

Even USD weakness fails to boost the euro today – as the US dollar weakens, the negatively-correlated single currency generally enjoys tailwinds.

GBP/EUR exchange rate forecast: central bank speeches to prompt movement?

The pound euro exchange rate is likely to trade through the remainder of the day upon central bank indicators, as markets wait for Fed Chairman Powell’s address and subsequently, a speech from Andrew Bailey.

If Powell strikes a dovish tone, the euro may enjoy tailwinds on account of its strong negative correlation with the US dollar; on the other hand, if the Chairman strikes a hawkish tone and USD trends higher, EUR is likely to tumble.

BoE rhetoric is forecast to be relatively hawkish, yet if Bailey is unexpectedly cautious in his speech, GBP could weaken. If strength wanes in pound exchange rates, EUR/GBP could change direction.

Olivia Evershed

Contact Olivia Evershed


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