Bank of England Outlook Dampens GBP/EUR Sentiment
The British Pound remains under pressure against the Euro as markets brace for the Bank of England’s monetary policy decision on Thursday. The GBP/EUR exchange rate has stalled below the 1.18 level, despite a modest recovery in late April fueled by easing global risk aversion and a temporary improvement in investor sentiment following softer rhetoric from U.S. President Donald Trump.
This recovery appears to have lost momentum, however, with GBP/EUR now drifting lower amid rising concerns over economic stagnation in the UK. The pair has proven highly sensitive to global equity volatility, and with markets now in a holding pattern ahead of new trade developments between the U.S. and China, the support from fading volatility has evaporated.
Technical indicators signal a short-term downtrend, with a risk of a more significant move lower should the Bank of England adopt a dovish tone. Expectations are rising that the Bank will cut interest rates this week and indicate the likelihood of a follow-up move in June. This would mark a shift from the current pace of quarterly cuts, potentially triggering a sharper reaction in currency markets. A break below the 1.1708 support level would pave the way for a decline toward 1.16.
The latest S&P PMI survey underscores the economic fragility, with April's composite index slipping to 48.2 — signaling contraction for the first time in over two years. The economic drag is attributed in part to fiscal tightening measures, including higher employer National Insurance Contributions and a minimum wage hike. While inflation pressures remain persistent, the Bank appears committed to its view that inflation will fall back to 2.0% in 2026, allowing it to focus on supporting growth.
GBP/USD: Consolidation Before the Next Leg Higher
The Pound has held its ground against the U.S. Dollar, even as the broader USD weakens amid continued domestic political uncertainty and a lack of conviction from market participants. GBP/USD reached a recent high at 1.3441 before entering a period of consolidation, finding strong support at 1.3234. This area has so far held firm, affirming the prevailing uptrend.
Despite mixed economic signals from both sides of the Atlantic, market sentiment remains broadly supportive of GBP/USD. A lack of significant U.S. data releases this week and underwhelming follow-through on last week's strong U.S. jobs report suggest the Dollar is lacking upward momentum. President Trump's unpredictability continues to inject uncertainty into markets, particularly around trade and fiscal policy.
The Bank of England’s upcoming policy decision could introduce short-term volatility, especially if a more aggressive easing cycle is hinted at. However, downside in GBP/USD may be limited due to rising inflation expectations, which could temper the BoE’s dovish stance. Should the Bank revise its inflation forecasts higher, this could offer a counterbalance to rate cut expectations and help Sterling recover.
Furthermore, easing energy prices are expected to reduce future inflationary pressures, adding complexity to the Bank’s policy balancing act. In the bigger picture, continued weakness in the U.S. Dollar — driven by long-term structural concerns and trade headwinds — supports the outlook for a renewed push toward and beyond 1.3440 once current consolidation resolves.
