Pound to Euro Rate Today: GBP Sides as Markets Forecast May Rate Cut

December 20, 2023 - Written by Tim Boyer

STORY LINK Pound to Euro Rate Today: GBP Sides as Markets Forecast May Rate Cut

The Pound (GBP) posted sharp losses after weaker-than-expected UK inflation data. Following the data, markets priced in more aggressive Bank of England interest rate cuts while bond yields declined.

The Pound-to-Euro (GBP/EUR) exchange rate retreated to 3-week lows just below 1.1540 before settling around 1.1550.

Lower yields will tend to undermine the Pound, but the rebound in UK asset prices will help underpin the currency and ECB rate expectations will also be a key element for the currency pair.

UK consumer prices declined 0.2% for November compared with expectations of a 0.2% increase for the month.

The headline annual inflation rate dipped further to 3.9% from 4.6% previously. This was significantly below consensus forecasts of 4.4% and the lowest reading since September 2021.

Petrol prices fell significantly on the month with fuel prices declining 10.6% over the year.

Food prices increased 9.2% over the year, the lowest reading since May 2022

The core inflation rate also declined sharply to 5.1% from 5.7% and below expectations of 5.5%. This was the lowest reading since February 2022.

There was also a price drop for a range of household goods and the cost of second-hand cars.

The services-sector inflation rate declined to 6.3% from 6.6%.

ONS chief economist Grant Fitzner commented; “The biggest driver for this month’s fall was a decrease in fuel prices after an increase at the same time last year. Food prices also pulled down inflation, as they rose much more slowly than this time last year.”

He added; “Factory gate prices remain little changed over the past year, while on an annual basis the change in costs that producers pay for raw materials and fuel was negative for the sixth consecutive month.”

Wholesale output prices declined 0.2% on the month while input prices declined 2.6%.

According to PwC economist Jake Finney; "This provides strong evidence that disinflationary pressures are building in the UK. Headline, core and services inflation are all now materially below the Bank of England's expectations in their last November Monetary Policy Report."

Following the data, markets moved to fully price in a rate cut by May 2024.

The 10-year yield dropped 10 basis points to 3.55% and the rate-sensitive two-year yield fell 17 basis points to 4.12%.

Equities gained ground with the FTSE 100 index hitting 3-month highs before a correction.

According to ING; “Investors now expect 140bp of cuts in 2024 after this latest downside surprise on inflation, starting in May. That’s maybe pushing it, and we still think the Bank will prefer to tread a little more cautiously with 100bp of cuts starting in August.”

The bank noted that the BoE has remained hawkish and expects this tone will continue in the short term.

Nevertheless, ING added; “this data has also seen investors reassess where the BoE stands relative to the Fed and European Central Bank. Up until now, markets had been expecting both of the latter to be much more aggressive than the BoE, but that narrative seems to be fading.”

According to Yael Selfin, chief economist at KPMG UK; “Today’s data will bolster the Bank of England’s argument that it remains too early to consider cutting interest rates, particularly with core inflation significantly above levels consistent with the inflation target.”

MUFG expects that the BoE will continue to push back against expectations of an early rate cut.

Nevertheless, it added; “All that said, the scale of the downside surprise in today’s CPI will likely prove telling, possibly not immediately, but as we proceed through Q1 next year. Before today, the OIS market implied the first rate cut would be in June. That is likely to be brought forward now and lower yields will keep GBP pressured to the downside for now.”

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TAGS: Daily Currency Updates Pound Euro Forecasts