GBP/EUR: UK Politics & German Sentiment Data To Drive Movement
  • Pound (GBP) pauses after a 2-day rally
  • Hawkish BoE bets support the pound
  • Euro (EUR) rises ahead of the interest rate decision
  • ECB is expected to hike rates by 25 bps

The Pound Euro (GBP/EUR) exchange rate is falling after two straight days of gains. The pair rose +0.05% in the previous session, settling on Wednesday at €1.1686 and trading in a range between €1.1680 – €1.1708. At 18:35 UTC, GBP/EUR trades -0.07% at €1.1682.

The pound is pausing for breath after two days of solid gains following strong data releases. Stronger than expected UK labour market data which showed that unemployment unexpectedly ticked lower and a sharp jump in wages, combined with a rebound in economic growth, have filled expectations that the Bank of England will continue raising interest rates to tame inflation.

Economists expect the Bank of England to continue hiking interest rates to a peak level of 5% in the third quarter of this year. However, the market is pricing in a higher peak rate of 5.75%; this is up considerably from 5.1% at the start of May.

There is no high-impacting UK economic data today, and as a result, the pound is drifting lower.

The euro is rising as attention turns to the ECB interest rate decision. The central bank is widely expected to raise interest rates for an eighth straight meeting to 3.5%; this will mark the highest level since July 2001.

The big question for the markets is how much higher borrowing costs must go. Inflation in the eurozone has started to cool, and in May, CPI was slower than expected at 6.1% annually, down from a peak of 10.6%. Economic growth is also beginning to stall as the eurozone tipped into a recession in the first three months of this year, factors which support a less hawkish ECB.

Still, services and wages are keeping upside pressure on inflation, which is still three times the central banks target 2% rate.

The market is expecting another interest rate hike in July. Any hints that this may be the last rate hike could pull the euro lower.