- Pound (GBP) is falling after losses last week
- The BoE may cut rates more aggressively next year
- Euro (EUR) is rising adding to last week’s gains
- German IFO sentiment rose to its highest level in a year
The Pound-Euro (GBP/EUR) exchange rate is inching lower after losses last week. The pair fell 0.35% in the previous week, settling on Friday at €1.1545. It traded between €1.1529 and €1.1618. At 10:30 UTC on Monday, GBP/EUR trades -0.03% at €1.1542.
The pound is trading quietly on Monday owing to a public holiday. The pound fell across the previous week despite data showing that UK inflation was hotter than expected in July at 3.8% and after PMI data also showed that business activity was stronger than expected in August.
However, the fact that the pound didn’t gain suggests that investors are cautious about the outlook for the UK economy.
Attention will start turning to the Chancellor’s Autumn Budget, which still has a sizeable black hole to be filled. As a result, the UK is facing further tax hikes, which will likely slow the economy. Investors are betting that the BoE could cut rates more aggressively next year. For this reason, the pound has struggled to move higher.
The EUR is rising modestly after German business morale rose unexpectedly in August. The IFO German business sentiment index rose to 89 in August up from 88.6 in July. This marked the highest level in over a year.
This increase comes amid improved expectations among companies. However, the data also comes after German GDP contracted by -0.3% quarter on quarter in Q2, a deeper contraction than initially feared, dimming expectations of a substantial recovery by the eurozone’s largest economy.
The head of the IFO Klaus Wohlrabe warned that he expected meagre growth in the third quarter, echoing comments by ECB President Christine Lagarde.
Looking ahead, attention will turn to GFK German consumer confidence data and German inflation data. Expectations are for German CPI to rise to 2.1% YoY up from 2%. The ECB is expected to cut rates again before the end of the year.