Can GBP Recover From Two-Month Low?

The Pound Euro (GBP/EUR) exchange rate rose through the first half of last week’s session before slumping to a two-month low in the latter part of the week as Labour came third in a key by-election.

DAILY RECAP:

The Pound (GBP) opened last week on a firm footing, extending the momentum generated by the previous Friday’s upbeat batch of UK economic data.

On Tuesday, Sterling traded in a more mixed fashion.

While gains were limited in places, the currency drew some underlying support after policymakers at the Bank of England (BoE) signalled a cautious approach to cutting interest rates, tempering expectations for an aggressive easing cycle.

As the week progressed, however, GBP sentiment deteriorated. Investor focus shifted to the Gorton and Denton by-election in Greater Manchester, widely viewed as an important barometer for Prime Minister Keir Starmer’s Labour Party.

The prospect of a weak result fuelled concerns about mounting political pressure on the PM and the potential erosion of the UK’s traditional two-party dominance.

The Pound edged higher against the Euro through midweek trade but slumped on Thursday after Labour finished third in the vote, behind the Greens and Reform UK.

Meanwhile, positive German data early last week protected the Euro (EUR) from steeper losses against the Pound.

However, EUR began to slip further as the session progressed, with Russia-Ukraine worries and an unexpected decline in German consumer confidence pressuring the single currency on Tuesday and Wednesday, respectively.

EUR stabilised on Thursday following comments from European Central Bank (ECB) President Christine Lagarde, allowing the Euro to regain the initiative against the weakening Pound.

The common currency managed to hold strong against Sterling on Friday, despite softer-than-forecast German inflation figures.

Near-Term GBP/EUR Forecast: Inflation and Spring Statement in Focus

Looking forward, the focus for EUR investors this week will be the Eurozone’s preliminary consumer price index for February. Markets expect inflation to have held at 1.7% last month, below the ECB’s 2% target, which could see the Euro weaken.

On Friday, an expected slump in German factory orders in January could place pressure on the common currency.

Meanwhile, the Pound may find direction from Chancellor Rachel Reeves’s Spring Statement on Tuesday.

While the update is forecast to be far more measured than last year’s turbulent Autumn Budget, investors will be alert to any policy signals that could alter the outlook for the UK economy.

Attention will then turn to Wednesday’s final reading of the UK’s services PMI. If the data confirms that growth in the dominant services sector stayed resilient in February, Sterling could draw some support.

Any meaningful revision to the flash estimate, however, may prompt a more pronounced reaction in GBP.