Pound to Euro Forecast: "Sterling Longs Best Played vs Cyclically Weak Currencies"

January 25, 2024 - Written by John Cameron

STORY LINK Pound to Euro Forecast: "Sterling Longs Best Played vs Cyclically Weak Currencies"

Boost to Pound Sentiment as PMI Data Again Beats the Euro Area, GBP/EUR Exchange Rate Hits 4-Month Highs

The latest business confidence data has reinforced market expectations that the UK economy will out-perform the Euro-Zone over the next few months at least.

After trading in a 1.1680-1.1700 band during Tuesday, the Pound to Euro (GBP/EUR) exchange rate strengthened to 4-month highs just above 1.1710.

There is now a greater chance that GBP/EUR will be able to challenge key resistance at 1.1765.

There will be fresh doubts whether the Bank of England (BoE) will be in a position to cut interest rates in the short term.

Although there will be doubts whether the ECB will adopt a more dovish stance, the pendulum will tend to swing towards markets expecting the ECB to cut interest rates ahead of the BoE.

According to Monex Europe; “Sentiment towards the UK economy is generally improving."

It added; "Sterling longs are best played on a relative value basis against cyclically weak currencies (i.e. euro and Canadian dollar)."

The flash January PMI business confidence data was released on Wednesday.

French and German PMI data exhibited the same pattern with the manufacturing data better than expected, but still firmly in contraction territory while there was net deterioration in services with disappointment that there was no move back into expansion.

The Euro-Zone PMI manufacturing index strengthened to a 10-month high of 46.6 for January from 44.4 previously and above consensus forecasts of 44.8.

In contrast, the services-sector index edged lower to a 3-month low of 48.4 from 48.8 in December.

The composite index did post a 6-month high for the month.

According to the survey, average prices charged for goods and services increased at the steepest rate since May 2023.

Overall business sentiment strengthened to an 8-month high.

Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, saw some chinks in light within the data; “The commencement of the year brings positive tidings for the Eurozone as manufacturing experiences a widespread easing of the downward trajectory witnessed in the past year.”

As far as monetary policy is concerned, he added; “In the ongoing discourse surrounding the optimal timing of rate cuts by the ECB, the PMI price indicators align with the sentiments of the hawks.”

The UK PMI manufacturing index increased to a 9-month high of 47.3 from 46.2 in December and above consensus forecasts of 46.7.

The services-sector index improved to an 8-month high of 53.8 from 53.4 and above market expectations of 53.2.

Overall business confidence increased to the highest level since May 2023.

As far as inflation pressures are concerned, prices charged by private sector firms increased at the weakest pace since last October which suggests some relief surrounding inflation pressures.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence commented “UK business activity growth accelerated for a third straight month in January, marking a promising start to the year.”

He added; “Business activity and confidence are being in part driven by hopes of faster economic growth in 2024, in turn linked to the prospect of falling inflation and commensurately lower interest rates.”

Williamson did, however, warn over the risk of disappointment on interest rates. He noted; “However, the surprising strength of growth in January, which has exceeded forecasts, may deter the Bank of England from cutting interest rates as soon as many are expecting.”

ING sees scope for further GBP/EUR gains; “Barring a material surprise in the eurozone print, the lingering divergence between contractionary (EZ) and expansionary (UK) PMIs will keep EUR/GBP pressured today.”

Rabobank commented on the potential for significant tax cuts after the better-than-expected government borrowing data. It noted; “On first sight, this should help support the UK’s lacklustre growth outlook and add to the cautious tone of the BoE. The data may thus be construed as GBP supportive, though the notion of UK tax cuts ahead of the general election later this year, is not new news.”

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TAGS: Pound Euro Forecasts