The Pound to Euro (GBP/EUR) exchange rate traded modestly higher on Friday after the Bank of England left interest rates unchanged, while markets also absorbed the fallout from Andy Burnham’s landslide Makerfield by-election victory.

At the time of writing, GBP/EUR was trading around €1.1542, up 0.2% on the day as investors weighed the Bank’s policy outlook against the prospect of renewed political uncertainty following Burnham’s return to Westminster. Burnham’s victory has intensified speculation over a potential challenge to Prime Minister Keir Starmer’s leadership.

DAILY RECAP:

The Pound (GBP) came under modest pressure following the Bank of England’s latest policy announcement.

As widely expected, policymakers voted 7-2 to leave interest rates unchanged at 3.75%.

Investors focused on the Bank’s updated assessment of inflation, with policymakers noting that lower energy prices and the easing of geopolitical tensions have reduced some of the upside risks to inflation.

This led markets to conclude that there is less immediate pressure on the Bank to tighten monetary policy further.

Sterling’s losses were partially limited by stronger-than-expected UK labour market data released earlier in the day.

The unemployment rate unexpectedly fell, while wage growth accelerated beyond forecasts, helping to reinforce the resilience of the labour market despite signs of softer economic growth elsewhere.

Meanwhile, the Euro (EUR) gained ground against Sterling despite facing pressure from a stronger US Dollar.

The single currency remained constrained by the Euro’s inverse relationship with the Greenback following the Federal Reserve’s hawkish policy guidance.

However, EUR sentiment was supported by the signing of an interim peace agreement between the US and Iran.

The agreement includes provisions aimed at restoring energy exports through the Strait of Hormuz and establishing a framework for broader negotiations over the coming months.

Lower energy prices are viewed as particularly beneficial for the Eurozone economy, given the region’s heavy reliance on imported energy supplies.

Near-Term GBP/EUR Forecast: BoE Outlook Remains Key for Sterling

Investors will continue to assess the implications of the Bank of England’s latest policy decision after policymakers voted to leave interest rates unchanged at 3.75%.

While the Bank acknowledged that easing energy prices and reduced geopolitical tensions have lowered some inflation risks, stronger-than-expected wage growth and a resilient labour market may encourage policymakers to remain cautious about signalling future policy easing.

As a result, Sterling could remain supported if markets conclude that UK interest rates are likely to stay elevated for longer than previously anticipated.

For the Euro, investors will continue to monitor comments from European Central Bank policymakers for clues regarding the outlook for monetary policy.

Lower energy prices remain supportive for the Eurozone economy, although the single currency may struggle to gain significant traction if the US Dollar remains underpinned by expectations that the Federal Reserve will maintain a restrictive policy stance.

With central bank policy expectations continuing to drive market sentiment, GBP/EUR is likely to remain sensitive to interest rate developments on both sides of the Channel.