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GBP/EUR surges to 21-month high as markets trim BoE rate cut bets | Currencies Direct

12/06/2024 currencies_direct_1

The pound euro exchange rate raced high in May, with the pairing being catapulted to a new 21-month high.

What happened last month?

May was a strong month for the pound, as positive UK economic data and signs of sticky inflation saw investors push back their bets on a Bank of England (BoE) rate cut.

Although dovish comments from BoE Governor Andrew Bailey dented GBP early in the month, the currency quickly recovered. UK GDP growth for the first quarter beat forecasts, showing that the British economy escaped recession at the start of 2024.

The country’s consumer price index for April also beat expectations. Although headline inflation cooled rapidly, the above-forecast reading was enough to dent BoE rate cut bets.

UK Prime Minister Rishi Sunak then announced a snap election to take place on 4 July. This cemented expectations that the BoE will not cut rates in June, further supporting Sterling.

Meanwhile, weakness in the US dollar lent the euro support last month, due to EUR’s negative correlation with USD.

In addition, rising hopes for a recovery in the Eurozone economy lifted the single currency. The bloc’s PMI surveys showed that private sector activity continued to expand, while positive German data also aided EUR.

With markets growing increasingly certain that the European Central Bank (ECB) would cut rates at its June policy decision, the euro then faced some selling pressure in the latter part of the month. Although these losses were tempered at the very end of May by a hotter-than-expected Eurozone inflation print.

The euro then received a boost at the start of June as the ECB concluded its latest interest rate decision. With the ECB’s 25bps rate cut already priced in, this allowed the single currency to rally as the bank raised its inflation forecasts and signalled it is unlikely to follow up with another cut in July.

GBP/EUR forecast

Looking ahead, the BoE will meet later in the month. However, as the bank is now widely expected to leave interest rates on hold and likely to provide only limited forward guidance for fear of influencing the UK general election, any impact on the pound may prove negligible.

Instead, we may see UK election jitters increasingly start to influence Sterling sentiment. GBP investors will be particularly focused on the publication of the Labour and Conservative manifestos and how the parties’ plans for fiscal policy may impact the UK economy going forward.

At the same time, movement in the euro is likely to be determined by upcoming Eurozone data releases, particularly the bloc’s latest consumer price index. If this reports another rise in inflation, this is likely to push back ECB rate cut bets and underpin EUR demand.

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