Scope for Pound Sterling Gains Against Euro on Today's ECB Meeting

March 7, 2024 - Written by John Cameron

STORY LINK Scope for Pound Sterling Gains Against Euro on Today's ECB Meeting

The Pound to Euro exchange rate (GBP/EUR) was unable to make headway on Wednesday and settled below the 1.1700 level.

The budget failed to lift the Pound and the focus will now be on Thursday’s ECB policy meeting to see if traders can force a breakout from narrow ranges on dovish ECB talk.

According to MUFG; “We have been continuing to recommend a short EUR/GBP trade idea on the back of our expectations that the ECB will begin to cut rates ahead of the BoE. Yesterday’s UK Budget did not significantly alter our outlook for BoE policy or the pound. The fiscal package was relatively small totalling 0.3% of GDP/year on average over the next five years.”

On a shorter-term view MUFG added; “For the euro to correct lower today, the ECB would have to provide encouragement for market participants to price in a higher probability of an April rate cut.”

Market reaction to the UK budget was notably limited.

According to ING; “If a measure of success for yesterday's budget was for Chancellor Hunt not to upset the Gilt market, then it was a good budget. Indeed, bond investors seemed to take the news of a higher FY 24/25 Gilt supply remit in their stride.”

Rabobank was more strident in its analysis; “While budgets really shouldn’t contain too much drama, as the UK knows best, the latest iteration reached new heights of boredom. Chancellor Hunt’s presentation lacked a cohesive narrative, let alone a strategy, and was bereft of fresh initiatives.”

It pointed to structural weaknesses; “This lack of ambition is particularly evident in the expected drop in public sector net investment from 2.5% of GDP currently to about 1.8% by 2028 – something difficult to comprehend given the many, many challenges the UK faces. Clearly, the events of 2022 still loom large over Downing Street.”

ING still sees some scope for Pound gains; “in the short term, we believe sterling could do a little better either at the hands of a softer euro (today) or a softer dollar (tomorrow). 0.8525/35 should be the direction of travel for EUR/GBP today. (1/1715-1.1730 for GBP/EUR).”

No changes in ECB interest rates are likely at Thursday’s meeting.

Danske Bank commented; “While neither the revisions to staff projections nor Lagarde will close the door to a rate cut at a specific meeting, we continue to expect that the key meeting for the first rate cut will be the meeting in June. We do not believe that the incoming data since the January meeting has been sufficiently weak to make April the baseline meeting.”

Socgen has adjusted its forecast slightly and now expects a rate cut in June rather than September.

ING notes pressure on the bank; “With recent macro data, the pressure on the ECB to cut rates earlier has gone up. We still think that the ECB has good reasons to resist that pressure and to push back expectations. Nevertheless, the subtle changes in the official communication should continue, sending more precise signals for a June rate cut.”

Rabobank is slightly more cautious; “June remains the first ‘live’ meeting in our view, but we still favour a first cut in September.”

Confidence in the Euro-Zone economy remains weak with particular concerns over Germany which will tend to limit Euro support.

The IFO economic institute has lowered its 2024 GDP growth forecast further to 0.2% from 0.7%.

Timo Wollmershäuser, IFO's head of forecasts commented; “Consumer restraint, high interest rates and price hikes, the government's austerity measures and the weak global economy are currently dampening the economy in Germany and leading to another winter recession."

Wells Fargo expects inflation concerns will dominate; “While the Eurozone economy is on the verge of recession and experiencing no growth, inflation that is still above the ECB's target and wage growth that is likely still too high to achieve that target should keep the ECB on hold this week and for the next few months.”

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TAGS: Pound Euro Forecasts