Pound to Euro Rate Edges Lower on Hawkish ECB Rhetoric

January 11, 2024 - Written by James Fuller

STORY LINK Pound to Euro Rate Edges Lower on Hawkish ECB Rhetoric

Sterling overall has been held in narrow ranges during Wednesday.

The Pound to Dollar (GBP/USD) exchange rate found support below 1.2700, but stalled below 1.2750 and traded around 1.2735.

The Pound to Euro (GBP/EUR) exchange rate edged lower to just above 1.1615.

ECB Council member Schnabel stated that financial conditions have eased and it was too early to talk about interest rate cuts which hampered GBP/EUR support.

Schnabel added; “Policy rates need to be sufficiently restrictive for as long as necessary to ensure that inflation sustainably returns to 2%. A slowing economy is part of monetary policy transmission.”

Money markets are currently pricing in around 115 basis points (bps) of BoE rate cuts in 2024, compared with 140 bps last Thursday, according to money market pricing.

In comments on Wednesday, Bank of England (BoE) Governor Bailey stated that he did not want to comment on the outlook for monetary policy.

He did, however, note that mortgage rates have declined and added; “but let's just take the market for a moment - obviously that is feeding through into mortgage costs and I hope that is something that continues."

Bailey, however, did, add that it is important to return inflation to target.

The latest UK GDP data will be released on Friday with consensus forecasts of 0.2% growth for November GDP after a 0.3% decline for October.

There will be major data releases next week with the labour-market data on Tuesday and inflation data on Wednesday.

Stronger-than-expected data would give the Bank of England fresh ammunition to maintain a hawkish policy stance.

Weak data, however, would trigger fresh speculation that the BoE will move rapidly towards rate cuts.

ING commented; “We remain of the view that a deterioration in economic conditions in the UK will ultimately warrant substantial BoE rate cuts (we estimate 100bp), while markets are considerably overestimating the size of the ECB easing cycle.

This trend would tend to undermine the Pound against the Euro.

Nevertheless, it expects the BoE will hold the line in the short term. It noted; “data releases and BoE commentary in the near term may encourage some hawkish repricing at the front-end of the GBP curve, which could keep pressure on EUR/GBP.

It still sees scope for GBP/EUR to trade above 1.1630 in the near term.

ING did, however, add; “We still target a rebound in the pair from 2Q onwards.” This would imply a selling in GBP/EUR.

According to Danske Bank; “We still think that the Fed will initiate its rate cutting cycle in March, but will then opt for only gradual quarterly cuts, which leaves room for a modest rise in short-end yields compared to current pricing.”

Danske added; “More timely measures of market rental prices still clearly point towards further disinflation, but after the downtick in mortgage rates since October, some indicators such as MBA mortgage applications or pending home sales have begun to edge higher.”

According to the bank; “This reflects easing financial conditions transmitting quickly into the real economy, which could translate into more persistent housing inflation over the next 1-2 years.”

Danske also noted that recession calls are being dialled back.

Expectations of stronger US growth would tend to underpin the dollar, especially as markets would scale back Fed rate hikes.

MUFG is uneasy over the international outlook; “The gloomy global growth backdrop that we believe will help limit US dollar selling for now was reinforced yesterday by the latest World Bank ‘Global Economic Prospects’ report that highlighted, given their 2024 forecast, a 5-year growth run that would be the worst since the early 1990’s.”

According to Scotiabank; “Solid sterling gains from the overnight low just under 1.27 cast a positive light on near-term price action but there has been little follow through demand through the low 1.27s and broader trading patterns still lean somewhat bearish for the pound’s outlook.”

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