Pound to Euro: UK Optimism Underpins Sterling Exchange Rates

February 24, 2024 - Written by John Cameron

STORY LINK Pound to Euro: UK Optimism Underpins Sterling Exchange Rates

The Pound to Euro exchange rate (GBP/EUR) found support below 1.1670 on Thursday and rallied to the 1.1700 area.

Overall risk conditions were broadly favourable which helped underpin Sterling and GBP/EUR traded just above 1.1700 on Friday.

According to ING, GBP/EUR can secure limited net gains on interest rate expectations. It noted; “we have some doubts the [EUR/GBP] pair can rally further in the near term, as markets may be more inclined to push 2024 ECB easing expectations back to 100bp (now 90bp) rather than pricing in three full cuts in the UK.

The UK PMI business confidence data overall was slightly stronger than expected.

MUFG noted; “The UK data yesterday was also indicative of an improving outlook and the technical recession that took place in the second half of last year looks like it is probably over.”

Overall confidence in the UK economy has improved, although there are still barriers to a sustained recovery.

The GfK consumer confidence index, for example, edged lower to -19 for February from -19 the previous month and compared with consensus forecasts for a further slight improvement for the month.

Four of the five components declined on the month while there was no change in the expectations for the personal financial position.

Joe Staton, client strategy director at GfK, commented that this was a “mixture of bad news and good news”.

According to Staton; “The bad news is that the improvement in the Overall Index Score seen over recent months stalled slightly in February due to a fall across most measures. However, the good news is that optimism for our personal financial situation for the next 12 months has not slipped back,”

He added: “With the underlying trend pointing to slow improvement in the consumer mood, monthly slips are a normal part of the longer-term picture. As time goes by, measures for moving us into a more stable economic environment should hopefully strengthen consumer confidence. As long as the underlying positive trend has not suddenly reversed, patience will pay off.”

MUFG commented; “The better UK data and the strong risk appetite should be benefitting the pound more than what we are seeing to date. However, concerns over growth seem to be lingering and possibly holding GBP back. Mortgage rates have turned moderately higher again possibly adding to concerns.”

The Euro-Zone data was mixed on Thursday with weakness in German manufacturing still a key element.

The German IFO business confidence index edged higher to 85.5 for February from 85.2 previously and in line with consensus forecasts.

There was no change in the current assessment while there was a small recovery in the expectations component.

The IFO Institute commented; “In manufacturing, the business climate index fell. Assessments of the current situation have not been so low since September 2020. Expectations are virtually as pessimistic as they were the previous month. The decline in the order backlog continues unabated. Companies have announced further cuts to production.”

According to ING; “the question FX analysts like us are trying to answer now is whether the euro has already largely priced in the German slump or if other factors have prevented it from taking the hit.”

The bank added; “We think the former explanation is more accurate, although it requires an additional key point. The key question is therefore whether mounting evidence of German economic weakness should be associated with prospects of faster and earlier rate cuts by the ECB. President Lagarde and many of her colleagues tried to send the message that no, it shouldn’t. Inflation – and above all wages – are the real focus, so the relative resilience of the euro should not be surprising.”

ING also noted the contrasts between the UK and Euro-Area monetary policy outlook; “If the ECB had to convince markets that rate cut expectations were overly optimistic, the Bank of England has the “privilege” of letting data do the talking.”

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TAGS: Pound Euro Forecasts