Pound Sterling: Downbeat OECD Outlook Undermines GBP, EUR Below 1.17

May 2, 2024 - Written by John Cameron

STORY LINK Pound Sterling: Downbeat OECD Outlook Undermines GBP, EUR Below 1.17

The Pound to Euro exchange rate (GBP/EUR) dipped to lows near 1.1680 in early Europe on Thursday before a recovery to near 1.1700.

The Pound was undermined by a downbeat OECD assessment of the UK economy.

In its latest update, the OECD downgraded the UK forecasts for this year and next with GDP growth forecast at just 0.4% for 2024 and 1.0% in 2025.

Although the 2024 UK forecast is marginally above the 0.2% for Germany, the 2025 forecast puts the UK at the bottom of the G7 league.

As far as monetary policy is concerned, the OECD called for the Bank of England to resist an early cut in interest rates.

According to the OECD; "The fiscal and monetary policy mix is adequately restrictive and should remain so until inflation returns durably to target.”

The OECD does see scope for interest rates to fall to 3.75% by the end of next year.

Monetary policy decisions will continue to dominate overall Pound moves, especially with the latest BoE interest rate decision next week.

There is only a very small chance of a rate cut at the May meeting and a cut is only priced in fully for September. Nevertheless, June and August are also seen as viable options.

At this meeting, there will be an updated Monetary Policy Report which will contain updated inflation and growth forecasts, together with indications of the expected rate path.

The bank will also give crucial forward guidance on the medium-term rate path.

Market expectations for rate cuts have tended to be pushed back, especially with the Fed warning that US rate cuts are likely to be delayed.

According to MUFG; “We are maintaining our view of the BoE cutting rates in June although admittedly the risk is certainly skewed in favour of a hold and the first cut not coming until August. The MPC is divided and a vote to cut in June would likely be very close.”

NatWest considers that dovish guidance is likely; "Implicitly, BoE policymakers will be signalling that the market is - substantially - under-pricing the likely magnitude of required rate cuts in 2024,"

UK local elections will be held on Thursday. Opinion polls indicate that the Conservative Party will suffer significant losses, but the scale of the defeat will be important.

A slightly better than expected performance would come as some relief for Prime Minister Sunak while a very heavy defeat would increase talk of a challenge against him.

This latter scenario would be likely to have some negative impact on the Pound.

Euro-Zone developments will also continue to be watched closely.

The final reading for the Euro-Zone PMI manufacturing index was revised marginally higher to 45.7 from 45.6 previously.

Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, commented; “What is going to rescue the Eurozone economy? While this is a difficult question, one thing is clear: It’s not the manufacturing sector. Instead, this sector is prolonging its drawn out recession into April.

He added; “A recovery often starts with some positive momentum in the capital goods sector. Instead, and in a worrying sign, capital goods have been hit particularly hard in April.”

Overall business sentiment, however, improved for the second successive month to the highest level since February 2022. The services sector data has also been notably more positive.

MUFG expects the Euro will be resilient. It notes; “This view reflects the positive benefits that should become evident in services activity as energy prices drop back, helping lift real income and consumer spending. We are now getting tentative signs of that emerging.”

It added; “There is compelling evidence now of better growth conditions ahead which will provide support for EUR at lower levels.”

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TAGS: Pound Sterling Forecasts