Pound to Euro: Back Above 1.1625, Short-Term Stabilisation Ahead

April 24, 2024 - Written by John Cameron

STORY LINK Pound to Euro: Back Above 1.1625, Short-Term Stabilisation Ahead

The British Pound Sterling recovered ground on Tuesday following firm data for the services sector while comments from Bank of England (BoE) chief economist Pill were more hawkish than expected.

The Pound had come under strong pressure after markets sensed momentum towards an early cut in interest rates, but comments from Pill triggered some reassessment of the situation.

UK equities have also maintained a strong tone with the FTSE 100 index posting fresh record highs.

After hitting 3-month lows close to 1.1570, the Pound to Euro (GBP/EUR) exchange rate recovered to 1.1630 on Wednesday.

Evidence of a rebound in the Euro-Zone economy will make it difficult for the Pound to extend the recovery.

According to the latest Reuters poll, there is an even split between investment banks expecting a rate cut in June or in the third quarter of 2024.

According to Pill; “the absence of news and the passage of time have brought a Bank Rate cut somewhat closer.”

He still warned over underlying inflation trends and added; “I do think that the persistent component of inflation is being squeezed out of the system by restrictive monetary policy. But I don’t see reason to believe that is happening more rapidly or profoundly than I expected six months ago.”

As far as guidance is concerned, Pill commented; “In my view there are greater risks associated with easing too early should inflation persist rather than easing too late should inflation abate. I am erring on the side of caution with reducing the bank rate.”

Sanjay Raja, senior economist at Deutsche Bank commented; “Should upside inflation risks crystallise over the coming months, akin to what we're seeing in the U.S., the start date for rate cuts could be pushed back yet again."

MUFG noted potential inflation concerns within the PMI data. It commented; “After a sustained decline in service input prices reported in the PMI data, the April advance Input Price Index jumped to 68.7, the highest level since May last year. If sustained that would point to output price increases. It’s just one data-point but will only add reason for the hawks arguing caution in cutting rates.”

ING noted splits within the MPC; “As things stand now, it looks like at least four of nine MPC members are dissenting against the recent dovish rhetoric.”

MUFG also noted divisions; “While we would argue that prospect remains plausible it is also clear that the MPC remains divided and that reaching the required majority to cut rates will be difficult over the coming months.”

It added; “In that sense, a June rate cut is a close call and lots will have to go favourably from an inflation perspective to get a cut by then.”

The German IFO business confidence index improved to 89.4 for April from a revised 87.9 previously and above expectations of 88.9.

There was a small improvement in the current conditions component and a larger improvement in the expectations index.

According to the IFO; This is the third consecutive rise. Companies were more satisfied with their current business. Their expectations also brightened. The economy is stabilizing, especially thanks to service providers.

ING commented; “A third monthly increase in the Ifo index strengthens the view that the German economy has left the trough behind and should be able to enjoy some more cyclical improvement.”

It was still relatively cautious over the outlook; “This doesn’t necessarily mean that a strong recovery is imminent as structural weaknesses remain. A new risk of this cyclical improvement could be that it gives rise to policy complacency.”

ING added; “EUR/GBP is back below 0.8600 this morning (GBP/EUR above 1.1625), and we could see some stabilisation in the short term as both the UK calendar and BoE-speak go quiet.”

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Pound Euro Forecasts