Pound to Euro Rate Today: Consolidation Ahead of UK Wages Data

December 12, 2023 - Written by John Cameron

STORY LINK Pound to Euro Rate Today: Consolidation Ahead of UK Wages Data

The Pound Euro exchange rate was unable to make headway on Friday, but did find support below the 1.1650 level and consolidated around 1.1665 on Monday as relatively narrow ranges prevailed.

GBP/EUR hit 3-month highs last week, but was unable to break above 1.1700 on three separate occasions which helped trigger a limited correction.

Central bank interest rate decisions and forward guidance will be very important this week.

Given economic divergence, Rabobank sees scope for GBP/EUR gains to 1.1765 on a 6-month view.

There are strong expectations that the Bank of England (BoE) and ECB will leave interest rates on hold this week.

There are also expectations that both central banks will push back against market pricing for aggressive interest rate cuts next year.

The economic data, especially from the UK, will be important in determining whether markets take hawkish guidance seriously or consider that it is not realistic.

The latest UK labour-market data will be released on Tuesday with wages set to be the principal focus.

Headline average earnings growth is forecast to slow to 7.6% from 7.9% with strong data reinforcing a hawkish BoE stance.

According to the latest Make UK survey factories boosted output in the final three months of 2023 with stronger export orders and the fastest build in inventories for four years.

Export orders also exceeded domestic orders for the first time since the coronavirus pandemic.

Fhaheen Khan, Senior Economist at Make UK commented; "After the economic and political shocks of the last few years there is some semblance of stability returning for manufacturers."

Nevertheless, manufacturing growth is still expected to be held to a very weak 0.1% for 2024 given high borrowing costs.

As far as interest rates are concerned, Goldman Sachs now expect that the BoE will sanction the first rate cut in August 2024 with cuts at all subsequent meetings until reaching 3% by mid-2025.

Rabobank expects that the BoE will be determined to stick to a hawkish stance; “It will take time before the labour market weakening we anticipate becomes painful enough to fully uproot inflation. Even as we see a 5.25% policy rate as unsustainably high for the UK economy, we only expect to see the first cut in November 2024.”

Rabobank also notes that the IMF and OECD both expect Germany will be the weakest G7 economy in 2023 and that the European Commission is focused on ways to enhance the competitiveness of the Eurozone.

It adds; “Assuming that inflation can be kept under control, a period of relative EUR weakness could be useful in supporting the Eurozone economic outlook. That said, it may be unavoidable in view of structural challenges facing the bloc.”

According to MUFG; “It will become harder for the ECB to justify maintaining restrictive policy if inflation falls back to target and the euro-zone economy continues to stagnate next year.”

It added; “So while the ECB may attempt to push back this week against current market pricing it will be difficult to discourage expectations for earlier and deeper cuts if the economic data flow is moving in that direction.”

Market positioning will also be a key element.

The latest COT data released by the CFTC reported that non-commercial Sterling positions had switched to a net long position of 11,700 contracts in the latest week from a short position of close to 8,000 previously.

This was the first long position since the end of September.

Rabobank commented; “GBP speculators now hold a net long position, after being net short for nine weeks. This move was driven by a decrease in short positions. Several BoE speakers emphasized that UK inflation continues to be too high, and the labor market remains tight.”

There was also an increase in long Euro positions to over 150,000 in the latest week.

Overall, there is still scope for a net increase in long Sterling positions.

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TAGS: Daily Currency Updates Pound Euro Forecasts