Pound to Euro Rate: Tests Important Resistance on UK/EZ Divergence

January 8, 2024 - Written by Frank Davies

STORY LINK Pound to Euro Rate: Tests Important Resistance on UK/EZ Divergence

The Pound to Euro exchange rate strengthened to a 2-week high just below 1.1630 on Friday before correcting slightly on Monday to trade around 1.1610.

The relative outlook for the UK and Euro-Zone will remain a key element for the Pound.

According to Rabobank; “While it is still difficult to paint a glaringly optimistic picture of the outlook for GBP, we see potential for EUR/GBP to tick lower to 0.84 on a 12-month view, in part due to the poor position of the German economy. (GBP/EUR gains to 1.1905)

The UK currency gained ground last week following better-than-expected UK data releases with an improvement in business confidence and evidence of a tentative rebound in the housing sector.

The domestic calendar is very light early this week ahead of Bank of England Governor Bailey’s testimony to the Treasury Select Committee on Wednesday.

Bailey is due to testify on the financial stability report with his commentary on the UK economy and interest rates also a key element for markets.

The latest GDP data will be released on Friday with consensus forecasts for a 0.2% monthly increase for November following the 0.3% decline for October.

According to ING; “Overall, we expect a generally positive impact on sterling, especially in the crosses such as EUR/GBP, as Bailey may keep signalling a more cautious tone compared to the market on rate cuts and growth should bounce back in the November print.”

As far as the Euro-Zone is concerned, German factory orders increased 0.3% for November, but this was weaker than market expectations of a 1.0% increase and followed a 3.8% decline in October.

The Euro-Zone Sentix investor confidence index improved slightly to –15.8 for January from –16.8 previously, but below consensus forecasts of –15.5.

According to Sentix; “The sentix overall economic index for the eurozone rises for the third time in a row to -15.8 points. However, even though the situation and expectations values have each risen by 1 point, this does not yet ensure a turnaround.”

It added; “One of the reasons for this is Germany. Contrary to the Eurozone trend, the overall score fell by 0.6 points. Situation and expectation values are declining, emphasising that the recession in Germany persists and will not go away on its own without further ado.”

More positively, there was a significant improvement in services-sector confidence and the overall business and consumer confidence index improved to 96.4 from 94.0 previously.

The headline Euro-Zone inflation rate increased to 2.9% for December from 2.4% the previous month, primarily due to less favourable base effects and slightly below consensus forecasts of 3.0%.

The core rate retreated to 3.4% from 3.6% and in line with expectations.

According to MIFG; “The pick-up in headline inflation is expected to prove short-lived.”

It notes that on a six month annualized basis, headline inflation slowed to 0.9% in the second half of last year compared to 5.2% in the first half of last year. Core inflation also slowed to 1.0% in the second half of last year compared to 5.9% in the first half.

MUFG adds; “We expect the slower pace of inflation to continue in the first half of this year and to open the door for the ECB to begin cutting rates in Q2.”

According to ING; “We had called for a return to 0.8600 in EUR/GBP as the year started. Now, there is probably some further downside room as BoE rate expectations appear more flexible to a hawkish repricing than the ECB ones, at least in the near term.”

This would mean GBP/EUR moving above the 1.1630 resistance area.

ING is, however, still bearish on the medium-term Pound outlook.

It adds; “That said, these are attractive levels to play a longer-term bullish view on the pair based on a deterioration of UK economic conditions and consequently more aggressive cuts by the BoE than the ECB.”

It forecasts GBP/EUR losses to 1.1365 on a 3-month view.

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Pound Euro Forecasts