Euro to Pound Rate "Finds itself in a State of Flux": Danske

March 2, 2024 - Written by Tim Boyer

STORY LINK Euro to Pound Rate "Finds itself in a State of Flux": Danske

The latest UK data indicates that hopes for lower interest rates have underpinned a rebound in the housing sector and boosted business confidence.

The Euro has held firm, however, and the Pound to Euro (GBP/EUR) exchange rate has edged lower to 1.1675.

Solid data and expectations of tax cuts next week should still underpin GBP/EUR in the short term.

UK mortgage approvals increased to 55,200 for January from an upwardly-revised 51,500 previously. This was significantly above consensus forecasts of 52,000 and the strongest reading since October 2022.

There was also a strong increase in consumer credit of £1.88bn from £1.26bn previously.

The overall increase in net lending, however, was held to £0.8bn due to a significant increase in mortgage repayments.

Ashley Webb, UK economist at consultancy Capital Economics, commented; “January’s money and credit figures suggest the drag on consumer spending and the housing market from higher interest rates is easing, which suggests an economic recovery, at least in some sectors, has already begun.”

He still injected a note of caution as market rates have edged higher over the past few weeks.

According to Webb; “Increasing interest rate expectations will mean the fall in mortgage rates will now pause, and could partially reverse.”

He added; “Therefore, a full recovery to 65,000 approvals a month - the norm before the pandemic – is unlikely before the end of the year.”

The Lloyds Bank business confidence index edged lower to 42 for February from 44 the previous month, but remained above the historic average.

As far as trading prospects are concerned, confidence increased to the highest level since April 2017 amid hopes that interest rates would decline.

With a decline in planned staff cuts, the net hiring plans increased to the highest level since May 2022.

Hann-Ju Ho, senior economist at Lloyds Bank Commercial Banking, commented; “This month’s data still reflects a positive mood among businesses despite a marginal fall in overall confidence. Firms appear to be upbeat about their prospects and the economy, supporting their positive staffing expectations.”

There will still be concerns over inflation with 61% of companies expecting to raise prices this year. Wage pressures also declined only slightly on the month.

The immediate focus will turn to fiscal policy.

MUFG commented; “The next key event for the pound in the week ahead will be the government’s upcoming budget announcement on 6th March. The pre-election budget is expected to provide fiscal giveaways that could provide fresh impetus for a stronger pound.”

It added; “While the size of the potential fiscal giveaway is unlikely to be sufficient to significantly alter the performance of the UK economy, it could discourage the BoE from delivering an earlier rate cut in May or June.”

Germany will release the latest inflation data on Thursday. The regional data suggests that there will be a significant decline in the annual rate from 2.9% the previous month.

The Spanish inflation rate declined to 2.8% from 3.4%, in line with expectations while the French rate declined to 2.9% from 3.1%, but above forecasts of 2.7%.

Inflation data will be watched closely by the ECB and there will be an impact on interest rate expectations ahead of next week’s policy meeting.

According to Nordea, there will be further resistance to any near-term rate cut; “Next week’s ECB meeting is likely to feature another round of downward inflation forecasts, but given the ECB’s willingness to wait for more labour market data, the main message is set to point to a baseline of a first cut in the summer.”

According to Danske Bank; “The EUR/GBP pair finds itself in a state of flux, hovering around the 0.85 level without clear direction, amid a global investment environment lacking definitive trends.”

It added; “While relative growth outlooks and central bank rate projections may pressure GBP in the medium term, the potential for the UK economy to outperform the euro area poses a risk to this perspective.”

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TAGS: Euro Pound Forecasts