Pound to Euro: Buyers See Retreat Near 1.17 Ahead of UK GDP

February 14, 2024 - Written by Frank Davies

STORY LINK Pound to Euro: Buyers See Retreat Near 1.17 Ahead of UK GDP

The Pound to Euro (GBP/EUR) exchange rate retreated sharply from 5-month highs of 1.1760 after the latest UK inflation data and retreated further to near 1.1700 after Bank of England Governor Bailey stated that downward pressure on inflation is quite broad-based.

Markets are pricing in a 50% chance of a June rate cut with immediate GBP/EUR support likely close to 1.1700.

UK consumer prices declined 0.6% for January after a 0.4% increase previously and compared with consensus forecasts of a 0.4% decline.

The headline year-on-year inflation rate held at 4.0% and slightly below expectations of a marginal increase to 4.1%.

The underlying rate held at 5.1% and marginally below expectations of 5.2%.

The largest upward contribution to inflation came from housing and household services (principally higher gas and electricity charges), while the largest downward contribution came from furniture and household goods, and food and non-alcoholic beverages.

In testimony to the House of Lords on Wednesday, BoE Governor Bailey was still cautious with comments that services-sector inflation is not compatible with 2% inflation while there is still a degree of uncertainty over the labour market.

Investec's chief economist Philip Shaw said he expects the BoE to wait for more employment data and signs that pay growth is subsiding.

According to Shaw; "At this point in time, we see no need to change our base case, which is that the MPC (Monetary Policy Committee) will cut rates three times by a total of 75 bps this year, beginning in June."

Julian Jessop, an economist at the Institute of Economic Affairs added; “Interest rates are probably on hold until May, but when the Bank of England does move it is likely to move quickly, with rates ending the year at around 4pc.”

According to Barclays; “For all the effort by Governor Bailey to avoid fueling expectations for imminent rate cuts, MPC communication since the February meeting is beginning to shift in a more dovish direction.”

Barclays added; “That said we expect spill-overs to the pound from such an occurrence to also be fairly limited - up to c.2% depreciation vs. the EUR in a fairly extreme scenario of short-end repricing. Instead, the gradual erosion of the Brexit premium ahead of the general election ( likely in H2) and demand resilience make sterling a 'buy' on dips, in our view.”

Socgen noted; “In the UK, inflation data came in a tad better than forecast but services ticked up to a 3-month high of 6.5%. That’s not going to aid confidence at the BoE.”

It added; “EUR/GBP traded briefly below 0.8500 but a relief bounce is overdue. Targets will be lowered closer to 0.8400 ( 1.1905 for GBP/EUR) if the ECB cuts rates before the BoE.”

The latest UK GDP data is due on Thursday.

According to Deutsche Bank; Having walked a fine line between stagnation and recession for some time, we think the UK economy will have likely slipped into a marginal technical recession in H2-23– the first since the onset of the pandemic.”

The bank added; “On balance, we see upside risks to our forecasts on the back of strong and positive supply dynamics, easier fiscal policy, and a potential loosening in monetary policy later this year.

Euro-Zone GDP growth was confirmed at 0.0% for the fourth quarter of 2023, but there was a strong 2.6% industrial production increase for December compared with expectations of a small decline.

According to Scotiabank the data was mixed; “Eurozone data reports were mixed but perhaps added to negative EUR sentiment at the margin.”

ECB vice-president Luis de Guindos pushed back against near-term rate-cut expectations; “while we are heading in the right direction, we must not get ahead of ourselves. It will take some more time before we have the necessary information to confirm that inflation is sustainably returning to our two per cent target.”

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TAGS: Pound Euro Forecasts