The British pound fell to a four-month low against the euro on Friday, pressured by weaker UK economic data and falling gilt yields, while European bond yields climbed on expectations that
the European Central Bank (ECB) is finished with interest rate cuts.
The euro rose as high as 87.27 pence, a 0.24% increase on the day and nearing the April 11 high of 87.38 pence—levels last seen during peak market tensions over trade tariffs. A move beyond that would mark the euro’s strongest position against the pound since late 2023.
Sterling also slipped 0.4% against the U.S. dollar, trading at $1.3456.
Fresh data on Friday showed UK retail sales in June rebounded from May’s sharp decline but still came in slightly below analysts’ forecasts. This followed Thursday’s release of disappointing business activity figures for July, with employers cutting jobs at the fastest pace in five months.
“The labour market data is the most critical piece here,” said Derek Halpenny, head of global markets research for EMEA at MUFG. “The Bank of England is closely watching employment trends as it considers future rate moves.”
Gilt yields are on track for small weekly declines across the curve, in sharp contrast with rising yields on eurozone government bonds. The latter have been buoyed by hopes of a U.S.-EU trade agreement and signs that the ECB is done cutting rates.
Halpenny described the widening gap as a "notable divergence" that is pushing the euro higher against sterling.
The Bank of England has so far taken a more cautious stance on cutting rates compared to the ECB and other European central banks, due largely to persistently high inflation in the UK.
Since last year, the ECB has reduced rates by 200 basis points, while the BoE has cut just 100 basis points. Markets now expect the BoE to make two more 25-basis-point cuts this year, with around an 80% probability that the first will come at its early August meeting.
Analysts caution that if UK inflation begins to ease, the pace of rate cuts could pick up. However, with inflation hitting a one-year high in June, the BoE faces a challenging path ahead.
