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Shifting BoE rate cut bets drive significant volatility in GBP/EUR | Currencies Direct

06/08/2024 currencies_direct_2

The pound euro exchange rate was catapulted to a two-year high in July, before the pairing was met by a dramatic selloff at the start of August, following the Bank of England’s (BoE) latest interest rate decision.

What happened last month?

The pound rallied through the first half of July, with markets responding positively to the Labour Party’s election landslide.

Sterling found further support amid hawkish comments from two Bank of England policymakers and stronger-than-expected UK GDP growth in May.

The UK’s consumer price index for June then saw GBP/EUR hit a 23-month high as signs of sticky services inflation dampened bets on an August interest rate cut. However, the pound quickly retreated as cooling wage growth and contracting retail sales revived rate cut bets.

These data points were enough to prompt the BoE to cut rates in early August, leading to a sharp depreciation in the pound.

Meanwhile, trade in the euro was mixed last month, with the single currency initially falling against the pound.

Easing Eurozone inflation put pressure on the euro in early July, although the meeting minutes from the European Central Bank’s (ECB) June policy decision buoyed EUR as they showed that support for a rate cut was not unanimous.

The ECB decision in mid-July failed to provide the single currency with a clear direction. The bank left rates unchanged, as expected, with September’s decision remaining ‘wide open’.

In the second half of the month, EUR retreated against USD and recovered against GBP. However, at the very end of July, upbeat Eurozone GDP and a sticky CPI reading supported the euro.

GBP/EUR forecast

Looking ahead, the UK’s preliminary GDP figures for the second quarter of 2024 are scheduled for release in mid-August. GDP in the first quarter exceeded expectations, showing that the UK officially came out of recession with 0.7% growth in the first three months of the year.

Second-quarter GDP is forecast to have expanded at a slower pace of 0.5%. While this may be enough to support Sterling, any unexpected results could drive notable volatility.

At the same time, movement in the euro is likely to be determined by upcoming Eurozone data, particularly the bloc’s latest inflation figures. Inflation in the bloc has been hovering around 2.5% since February. Further signs that the ECB faces a tough last mile could boost EUR. 

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