Pound To Euro Exchange Rate Softens Amid Pared Back ECB Rate Cut Bets (2024)

The Pound Euro (GBP/EUR) exchange rate softened on Monday, as investors pared back their expectations of European Central Bank (ECB) interest rate cuts.

At the time of writing, GBP/EUR traded at around €1.1829, a fall of roughly 0.2% from Monday’s opening rates.

The Euro (EUR) firmed on Monday, as investors continued to pare back their expectations of imminent interest rate cuts.

The French election still played on investors minds during Monday’s session, as the sudden election remained hotly contested. The far right National Rally party maintained a notable lead against other parties, leading into the first round of elections on June 30.

This prompted concerns amongst investors, who are worried that French President Emmanuel Macron’s gamble on a snap election may have backfired. If the government is divided, it may prevent Macron’s party from delivering economic reforms.

These jitters were likely countered by hawkish comments from Chief Economist Philip Lane, who suggested that while inflation was on the right track, the ECB may need to keep a restrictive level of tightening.

Lane stated that: ‘There's a lot, a fair amount of confidence about the destination in the second half of next year. I think this is an example where we need to see the momentum come down in the second half of the year. We don't think the peak effect on inflation dynamics has happened. The ongoing impact of our monetary policy decisions will keep lowering inflation into next year.’

This prompted investors to pare back their bets on interest rate cut bets by the European Central Bank in July. While consecutive rate cuts always seemed unlikely, hawkish assertions from Chief Economist Lane further reduced any lingering bets, which supported the Euro.

Pound (GBP) Adrift amid Lack of Data

The Pound (GBP) struggled to find a clear direction of trade on Monday, as a lull in data releases limited sentiment towards the currency.

With impactful data due later in this week’s session, investors are likely hesitant to bet on the Pound as they await these releases, such as the latest consumer price index data.

Due to print on Wednesday, this release will likely prompt renewed volatility in the Pound as it is expected to bring inflation to the Bank of England’s (BoE) target rate of 2%, which may prompt increased interest rate cut bets and weaken the currency.

Dan Hanson and Ana Andrade of Bloomberg Economics, said: ‘All eyes will be on the services CPI reading, following April’s stronger-than-expected print. Looking ahead, headline inflation will probably fall below 2% in June, clearing the way for rates to be cut in August.’

Pound Euro (GBP/EUR) Exchange Rate Forecast: UK Inflation Data in Focus

Looking ahead for the Pound, the core catalyst of movement is likely to be the latest UK consumer price index data, due for publication on Wednesday.

In May, headline inflation is forecast to have cooled from 2.3% in April down to 2%. This could weigh heavily on the Pound as it would bring inflation directly in line with the Bank of England’s target rate, and may prompt speculation of imminent interest rate cuts.

Furthermore, core inflation is forecast to cool from 3.9% in April to 3.5%. This could further undermine the Pound by showing that inflation, minus more volatile measures, is continuing to cool in the UK.

For the Euro, the main driver of movement is likely to be the latest German ZEW economic sentiment index, which is set to show an increase in optimism from 47.1 in May to 50 in June.

This could strengthen the Euro by showing that sentiment in the Eurozone’s largest economy is continuing to improve, which may show a brighter economic outlook for the wider bloc.

However, political instability in France is likely to continue undermining the Euro during the week’s session. Due to the shock snap election, the outlook remains uncertain and may prompt instability in the common currency.