Pound-Euro could struggle to recover unless Eurozone inflation disappoints after the Bank of England maintained a cautious policy outlook.
The Pound to Euro (GBP/EUR) exchange rate edged higher on Thursday after touching a one-month low overnight, as investors digested the Bank of England’s latest policy decision and stronger-than-expected Eurozone GDP data.
At the time of writing, GBP/EUR was trading around €1.1663, marginally higher on the day.
DAILY RECAP:
The Pound (GBP) firmed ahead of the Bank of England’s interest rate announcement as markets modestly repriced expectations in response to rising oil prices following renewed US strikes on Iran.
Some investors anticipated the Bank might adopt a slightly more hawkish tone given the renewed inflation risks.
However, Sterling’s recovery stalled after the decision. Although policymaker Catherine Mann joined two colleagues in voting for an interest rate hike, Governor Andrew Bailey struck a cautious tone.
Bailey said there was little evidence that inflation was becoming embedded in the UK economy, while the Bank’s statement highlighted “clear signs of underlying disinflation” in recent data.
Meanwhile, the Euro (EUR) struggled to capitalise on stronger-than-expected Eurozone growth figures.
Fresh data showed the Eurozone economy expanded by 0.4% in the second quarter, beating forecasts for 0.2%, while first-quarter growth was revised up from -0.2% to 0%.
Despite the stronger economic backdrop, the single currency was unable to build meaningful gains against Sterling.
Near-Term GBP/EUR Forecast: Eurozone Inflation in the Spotlight
Looking ahead, Friday’s Eurozone inflation figures are expected to provide the next major catalyst for the Pound to Euro exchange rate.
Markets expect headline inflation to accelerate from 2.8% in June to 2.9% in July, while core inflation is forecast to remain unchanged at 2.4%.
A stronger-than-expected inflation reading could reinforce expectations for tighter European Central Bank policy and provide further support for the Euro, while weaker data could leave the single currency on the defensive into the weekend.
With no major UK economic releases scheduled, Sterling is likely to take its cues from broader market sentiment and developments in the Eurozone.
Our currency coverage draws on live market data, official economic releases and published bank research.
