Pound to Euro: Sterling Dips Below 1.1700 Ahead of Weekend

February 2, 2024 - Written by James Fuller

STORY LINK Pound to Euro: Sterling Dips Below 1.1700 Ahead of Weekend

The pound-to-euro (GBP/EUR) exchange rate dipped to lows at 1.1685 ahead of Thursday’s Bank of England (BoE) policy meeting.

The BoE vote split and guidance were less dovish than expected and this triggered a rebound in the Pound as markets pared expectations of a May interest rate cut.

GBP/EUR rallied to 1.1730 and traded above 1.1700 on Friday.

Overall ranges were relatively narrow with fresh doubts over an early cut in BoE and ECB interest rates.

There was a strong rally in Wall Street equities on Thursday which helped underpin risk appetite.

Although both the Euro and Sterling gain some support from stronger risk conditions, there tends to be net Pound support.

There is a relative lull in UK data in the short term which may limit GBP/EUR moves and SocGen expects that volatility in the pair will remain low.

The BoE held interest rates at 5.25% at Thursday’s policy meeting which was in line with strong consensus forecasts.

Six members of the committee backed the decision to keep rates on hold while Haskel and Mann continued to vote for an increase in rates due to inflation concerns.

In contrast, Dhingra voted for rate cut due to fears of over-tightening.

Bank Governor Bailey welcomed the progress on inflation, but stated that it was too early to consider a cut in interest rates and the bank would need to be confident that inflation would fall to the 2% on a sustainable basis before considering any cut in rates.

Markets overall were slightly less confident that interest rates would be cut at the May meeting with the decision now seen as a close call with June more likely for a cut.

According to Danske Bank “While the dovish tilt fell slightly short of market expectations, today's meeting marks an important shift in communication from the MPC, opening the door for impending rate cuts.

It added; “Before the next meeting on 21 March, we will get a lot of data, namely two job reports (including a continuation of LFS-based data) and inflation data for January and February. Overall, we expect the UK economy to show further signs of weakness, inflation to level off and wage growth to have peaked as shown by recent data releases.”

According to Unicredit; “We continue to expect the first rate cut in September, three months later than our forecast for cuts by the Fed and the ECB, reflecting stickier wage growth and services inflation in the UK.”

ING expects the first rate cut in August.

The headline Euro-Zone inflation rate declined to 2.8% for January from 2.9% previously, but this was slightly above consensus forecasts of 2.7%.

Similarly, the core rate of 3.3% was slightly above market expectations of 3.2%, but retreated from 3.4% for December.

Services-sector inflation held at 4.0% for the month.

Kamil Kovar, senior economist at Moody’s Analytics, commented; “core inflation only inched lower, with services especially coming in quite hot. While some of this hot reading is explained by regular annual re-pricing and a change in weights, it nevertheless makes a March rate cut a pipe dream, and raises the bar for a cut in April. A cut in June remains our baseline forecast.”

According to ING; “While today’s figure still shows easing price pressures, it is far too soon to give the all-clear on inflation. The ECB hopes that higher wages will be partially absorbed by lower profit margins. But if growth starts to pick up again in the second quarter, companies might have the pricing power to withstand margin compression, so inflation won't come down much further.

It added; “This is why we continue to believe that the ECB will be very cautious and will not contemplate any rate cut before June.”

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TAGS: Pound Euro Forecasts