Pound to Euro Rate Today: GBP/EUR Battles with Key Resistance

May 30, 2024 - Written by John Cameron

STORY LINK Pound to Euro Rate Today: GBP/EUR Battles with Key Resistance

The Pound to Euro exchange rate (GBP/EUR) briefly moved above key resistance at 1.1765 on Tuesday before settling just below this level.

A retreat in equities will tend to make it more difficult for the Pound to break through resistance levels.

There is optimism that both UK and Euro-Zone economies are strengthening with markets continuing to monitor monetary policy expectations very closely.

ING expects resistance will hold; “the key driver of the pair is monetary policy divergence between ECB and the Bank of England. Here, we see good potential for that policy story to turn favourable for a EUR/GBP rally.” (GBP/EUR losses).

Markets overall remain extremely confident that the ECB will cut interest rates at next week’s policy meeting with a reduction in the refi rate to 4.25% from 4.50%.

There is still a wider debate over the medium-term outlook with markets overall sceptical that the bank will sanction consecutive rate cuts.

In comments on Tuesday, Governing Council member Knot expressed further doubts that another rate cut in July is realistic. He noted; "Policy rates will slowly but gradually move to less restrictive levels. [Quarterly] Projection round meetings of the Governing Council will be the key meetings for our interest rate decisions."

Euro-Zone inflation releases will be important this week.

The German inflation data will be released on Wednesday with consensus forecasts for an increase in the annual rate to 2.4% from 2.2%.

HSBC commented; “Friday brings the flash estimate of Eurozone May CPI with the consensus looking for a nudge higher in the headline rate to 2.5% YoY from 2.4%, and for core to hold at 2.7%. This might look a little hawkish, but the ECB is more likely to look at the more modest outcome on the MoM rates (consensus 0.2%, down from 0.6% in April).

ING noted that data has not been entirely comfortable for the bank; “Wage growth came in higher than expected which the ECB quickly dismissed as being related to one-offs. Still, if inflation surprises to the upside, the ECB will be less comfortable cutting as these things add up.”

It added; “That will not deter the European Central Bank from a rate cut next week but may see the market continue to pare back expectations of further rate cuts this year. 58bp of ECB rate cuts are now priced for 2024 - down from 75bp just two weeks ago.”

A scaling back of expectations would support the Euro.

As far as inflation expectations are concerned 12-month expectations edged lower to 2.9% in the latest survey from 3.0% previously.

The 3-year rate declined also declined marginally to 2.4% from 2.5%.

Both figures remained above the ECB’s 2% inflation target.

The German consumer confidence index improved to -20.9 for June from -24.0 previously which was above expectations of -22.5 and the strongest reading since March 2022.

The latest CBI retail sales survey recorded a strong rebound to 8 from -44 previously, well above consensus forecasts of -24 and the strongest reading since the end of 2022.

Retailers do expect a small decline in sales for June.

Selling prices increased at the slowest rate since August 2020.

Alpesh Paleja, CBI Lead Economist, commented; “May’s increase in retail sales adds to the swathe of data pointing to an improvement in activity over the near-term. Falling inflation, and continuing real wage growth will contribute to a healthier consumer outlook, in turn supporting the retail sector further.”

UBS notes attempts to push prices higher; “Service inflation in directly and indirectly wage sensitive items drove a surprise that suggests British firms still believe they have pricing power. With the economy growing it looks likelier that they will be right.”

The bank, however, considers that markets are now too pessimistic over the potential for rate cuts.

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TAGS: Pound Euro Forecasts