Market Dump Heaps Pressure on GBP/EUR Exchange Rate

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Pound Sterling is headed for its biggest weekly slide against the Euro since December 2023.

The Pound to Euro exchange rate fell 0.60% on the day the Bank of England cut interest rates by 25 basis points, but the selloff extended amidst a sizeable drawdown in global equity markets centred on fears the U.S. economy is rapidly cooling.

U.S. markets fell after earnings from big technology names disappointed, which then Fed into notable selling pressures in the Asian session. "Nikkei 225 index took a sharp dive, falling over 5% at one point," says Dilin Wu, Research Strategist at Pepperstone. "In my view, this dramatic decline is not just a local anomaly but a symptom of broader global risk aversion."

Risk aversion can have a material impact on the Pound, which was already struggling following the Bank of England's rate cut. The Pound to Euro conversion is now quoted below 1.18 at 1.1772, levels last quoted on July 02.

The Pound tends to lose value against the Dollar, Yen, Franc and Euro when market sentiment deteriorates, but it can gain against 'high beta' currencies such as the antipodean dollars and Scandinavian currencies.

"Equity markets dropped globally on Friday as fear trading dominated ahead of the crucial U.S. job report. There has been a sell-off across many sectors, with tech shares registering the worst performances after investors digested the latest poor earnings reports from Intel, Amazon and Apple," says Pierre Veyret, Technical analyst at ActivTrades.

The Pound headed into Thursday's interest rate cut and 'risk off' market environment with unfavourable market positioning dynamics: market participants were holding a record 'long' on the Pound, betting it could rise further.

Above: GBP/EUR at daily intervals. Track GBP/EUR with your custom alerts; find out more here

Investment bank consensus forecasts update: The end-2024 and 2025 guide from Corpay has been released. It shows a sizeable uplift was made to the consensus forecasts for GBP/EUR. Please request a copy here.

When crowded positioning runs into unfavourable market news or data a washout of these positions can unfold, resulting in a sharp selloff.

To be sure, economists consider the Bank's August 01 move to be a 'hawkish' cut, judging that the Bank will proceed cautiously with further cuts.

This can sustain the bullish fundamentals that made the Pound 2024's best-performing currency heading into the Bank of England decision.

"We stay constructive," says Kamal Sharma, FX strategist at Bank of America. "Hawkish cut has no GBP impact. We remain constructive on better fundamentals."

So, while fundamentals remain supportive, market positioning and a global equity market wobble must first be navigated before the bulls can regain control of Pound Sterling.