Will GBP/EUR Extend Ten-Day Best?

At the time of writing GBP/EUR was trading at around €1.1742. Virtually unchanged from last week’s opening levels, but down from a high of €1.1766.

The Euro (EUR) got off to a poor start last week, following the publication of the Eurozone’s latest manufacturing PMI.

While May’s index reported the factory sector saw its best month since March 2023, it still undermined the single currency as it confirmed the manufacturing sector remained in contraction.

Adding to the pressure on the Euro in the first half of the week was the release of Germany’s latest jobs report.

While Germany’s unemployment rate held steady in April, the total number of people out of work rose to its highest level since March 2021 – raising fresh concerns over the recovery in the Eurozone’s largest economy.

EUR exchange rates remained on the back foot in the middle of the week as growth in the Eurozone’s services sector was revised lower in May’s finalised services PMI.

However, the single currency was then able to mount a recovery in the second half of the week, as the European Central Bank (ECB) delivered its latest interest rate decision.

Following the conclusion of its first policy meeting of the summer, the ECB announced a widely expected 25bps rate cut.

However, as the rate cut had been widely priced in by markets the resulting movement in the Euro was driven primarily by the bank’s forward guidance.

This saw EUR exchange rates firm as the bank raised its inflation forecasts for 2024 and 2025 and was coy regarding the possibility of further rate cuts. A move which seemly reduced the odds of a follow up cut in July.

Mark Wall, chief European economist at Deutsche Bank, commented: ‘As expected, the ECB cut rates 25bp. But the statement arguably gave less guidance than might have been expected on what comes next.

‘In that sense, the immediate tone is a “hawkish cut”. This is not a central bank in a rush to ease policy.’

Pound (GBP) Buoyed by Positive Risk Flows

The Pound (GBP) initially firmed this week, with the currency being supported by confirmation that growth in the UK’s manufacturing sector struck a two-year high last month.

An optimistic market mood then helped the increasingly risk-sensitive Sterling to maintain a positive trajectory through the first half of the week.

GBP exchange rates then began to falter in the second half of the session following a survey from the Bank of England (BoE), which pointed to a likely fall in inflation over the coming year as UK businesses expected to deliver lower wage increases over the next 12 months.

GBP/EUR Exchange Rate Forecast: Signs of a Slowing UK Labour Market to Weigh on Sterling?

Looking ahead, the UK’s latest jobs report is likely to act as a key catalyst of movement for the Pound Euro exchange rate this week.

This could lead to a pullback in Sterling if further signs of a cooling labour market and slowing wage growth stoke BoE rate cut bets. On the other hand, the Pound may firm if April’s figures outpace expectations.

Also potentially influencing GBP exchange rates will be UK election jitters, on the assumption that the main political parties will soon release their manifestos.

For EUR investors the only Eurozone data of note next week will be the bloc’s latest industrial production figures. Will a forecast rise in Eurozone factory output help to lift the single currency?