GBP/EUR Exchange Rate Finds Support at 1.16

January 11, 2024 - Written by Ben Hughes

STORY LINK GBP/EUR Exchange Rate Finds Support at 1.16

The Pound to Euro (GBP/EUR) exchange rate dipped from 1.1630 to 1.1600 on Wednesday following comments by ECB council member Schnabel.

GBP/EUR did find support at 1.1600 and settled around 1.1620 on Thursday.

There is the potential for choppy trading after the US inflation data later on Thursday with overall risk conditions likely to have a significant impact on GBP/EUR.

Weaker equities would tend to have a limited negative impact on the Pound.

Overall, there have been significant doubts whether market expectations of aggressive ECB and Bank of England interest rate expectations are realistic.

ECB moves have been slightly larger which has underpinned the Euro both against the Euro and other major currencies.

MUFG noted; “The implied yield on the March 2024 and December 2024 three-month interest rate futures contracts have increased by around 14bps and 33bps respectively since late last year.”

Bank of England Governor Bailey’s comments were relatively sparse in testimony to the Treasury Select Committee on Wednesday.

Bailey commented; “Price stability and inflation being a target is consistent with and supportive of financial stability. So it is important from a financial stability view that obviously we return inflation to target.”

Bailey, however, declined to comment on the outlook for monetary policy.

CMC Markets chief markets strategist Michael Hewson commented; "The market is increasingly polarised about where rates are going to go. The only certainty is we will get rate cuts, the bigger question is when.”

Hewson added; "I also think that the bar is quite high based on the last meeting - you still have three members calling for rate hikes. You have got to look for them to do a complete reverse turn."

He also noted that three members of the Monetary Policy Committee backed an interest rate hike at the December policy meeting and there would have to be a U-turn to help garner a majority for a rate cut.

Money markets are still pricing in a notable probability of a rate cut in May and a reduction is fully priced in for June.

The latest UK GDP data will be released at Friday’s European open with consensus forecasts for a 0.2% increase for November after a 0.3% contraction for October.

HSBC is doubtful whether there will be a significant positive impact. It noted; “How much solace GBP might take from a November gain is questionable given GDP for Q4 as a whole is likely to be non-existent.”

Deutsche Bank now forecasts that UK CPI inflation will average 2.5% year-on-year in 2024, down from a previous forecast of 2.7%.

There were relatively hawkish comments from ECB council member Schnabel on Wednesday.

According to Schnabel; “it is too early to discuss rate cuts” and “additional data confirming the disinflationary process” will be required to move from restrictive monetary policy.

There have been more dovish comments from other ECB members. According to Villeroy, for example, "We will cut rates this year when the inflation outlook is solidly anchored at 2% (with) effective and durable data.”

Schnabel did also warn over the economic outlook.

According to ING; “This tells us that there is nothing close to a consensus among policymakers on the direction of policy and that the current narrative from the hawks should remain one of pushing back against rate cut bets.”

MUFG took a similar view; “The recent hawkish repricing of ECB rate hike expectations was encouraged yesterday by comments from ECB officials indicating that they are in no rush to begin cutting rates imminently.

MUFG added; “It suggests that the first rate cut is unlikely until at least Q2 when the ECB has more data at hand.”

According to the bank; “The ECB’s caution over delivering rate cuts as soon as the market expects is helping to encourage a stronger euro at the start of this year.”

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TAGS: Pound Euro Forecasts