Pound to Euro Rate Recovery Attempt Stumbles as Sterling on Defensive

January 2, 2024 - Written by John Cameron

STORY LINK Pound to Euro Rate Recovery Attempt Stumbles as Sterling on Defensive

Both the Euro (EUR) and Pound Sterling (GBP) came under significant pressure against the dollar on Tuesday.

The Pound to Euro (GBP/EUR) exchange rate briefly recovered to highs above 1.1560 before a fresh retreat to near 1.1520 amid fragile global risk conditions.

Trading volumes remained relatively low and there was substantial position adjustment after the holiday period.

There had been substantial dollar selling during December and the US currency secured a corrective recovery, especially with expectations that the Euro tends to lose ground in January.

Overall risk appetite was also weaker during the day with significant net losses for equities.

The US S&P 500 index trading 0.8% lower after the Wall Street open while the FTSE 100 index retreated 0.2% on the day.

Both the Euro and Pound will tend to lose ground if global risk conditions are weaker while the UK currency overall is liable to be more vulnerable.

The British Retail Consortium (BRC) reported that shop prices increased 4.3% in the year to December, unchanged from the previous month and equalling the lowest reading since June 2022.

Food-price inflation slowed to 6.7% from 7.8% previously and the lowest reading for 18 months.

BRC Chief executive Helen Dickinson commented; "Overall shop price inflation remained steady in December. Households did have reason to celebrate as food inflation fell for the eighth consecutive month thanks to retailers’ efforts to bring down prices in the run-up to Christmas.

She added; “Non-food products had a more challenging December, with price inflation rising again following retailers’ investment in November Black Friday discounting and ahead of the January sales.”

According to the final data, the UK PMI manufacturing index was revised down slightly to 46.2 from the flash reading of 46.4 and compared with the 7-month high of 47.2 the previous month.

All components were in contraction territory for the month and overall business optimism declined to a 12-month low.

Rob Dobson, Director at S&P Global Market Intelligence, commented; “UK manufacturing output contracted at an increased rate at the end of 2023. The demand backdrop also remains frosty, with new orders sinking further as conditions remain tough in both the domestic market and in key export markets, notably the EU.”

He added; "With concerns about high interest rates and the cost-of-living crisis hurting demand, the outlook for manufacturers in the months ahead remains decidedly gloomy.”

Monex commented on Bank of England (BoE) expectations; "Whilst the data is clearly disinflationary at the margin, market pricing for rate cuts in the UK continues to look a little aggressive to us."

Monex added; "Progress on cooling price growth is set to slow over the coming months, and whilst we don’t rule out a rate cut from the BoE in Q2, on balance we suspect that inflation persistence will keep the BoE on hold into the second half of the year."

As far as Euro-Zone data is concerned, the Euro-Zone PMI manufacturing index was revised marginally higher to a 7-month high of 44.4 according to the final reading from the flash reading of 44.2.

The German index recorded an 8-month low while the French data posted a 43-month low for the month, reinforcing concerns over the outlook for these two major economies.

Stocks of purchases were depleted more rapidly with one of the largest declines in inventories on record.

Markets will continue to monitor expectations surrounding ECB and BoE interest rates.

At this stage, markets have fully priced in a 25 basis-point cut by May and 140 basis points of cuts by the end of 2024.

As far as the ECB is concerned, markets are pricing in just over 160 basis points of cuts which would take the deposit rate below 2.5%.

Any shift in relative expectations will be extremely important for the underlying GBP/EUR moves during the first quarter.

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TAGS: Pound Euro Forecasts