Pound to Euro Exchange Rate Forecast: 1.19 Lost?

June 20, 2024 - Written by John Cameron

STORY LINK Pound to Euro Exchange Rate Forecast: 1.19 Lost?

The Pound edged higher after the latest UK inflation data. The evidence of further sticky services-sector inflation increased doubts whether the Bank of England would cut interest rates at the August meeting, although the overall shift in pricing was limited.

The Pound to Euro (GBP/EUR) exchange rate strengthened to 1.1860 from 1.1830 before settling just above 1.1850.

There were no major Euro-Zone developments with markets till monitoring French political developments.

The headline year-on-year inflation rate dipped to 2.0% for May from 2.3% previously which was in line with consensus forecasts. The headline rate met the 2% target for the first time since July 2021 and hit the Bank of England target.

The underlying inflation rate dipped to 3.5% from 3.9%, the lowest reading since late 2021 and in line with market expectations.

On a monthly basis, the largest downward contribution from food prices while fuel prices put upward pressure on the rate.

Food prices increased 1.7% over the year from 2.9% in April.

The goods inflation rate retreated further to -1.3% from -0.8% previously while the services-sector rate edged lower to 5.7% from 5.9%.

Markets continue to debate the outlook for interest rates.

As far as interest rates are concerned, markets are pricing in only around a 5% chance of a rate cut this week with a 40% chance of an August move.

A cut is fully priced in by September and markets expect another cut by December.

According to Jake Finney, economist at PwC UK is concerned that the decline won’t be sustainable; “This is because underlying momentum remains above levels that are consistent with the 2% target, particularly with regards to services inflation.”

Luke Bartholomew, deputy chief economist at the asset manager abrdn, commented; “The big question now is whether underlying inflation pressures in the economy are consistent with inflation staying around 2% in the medium term, or whether inflation will start to edge higher again once favourable base effects fade.”

He added; “On that front, there is still evidence of residual stickiness in services inflation, reflecting the strength of wage growth recently. That is why an interest rate cut tomorrow is still very unlikely. But we think the Bank’s communication tomorrow will set out a path for a cut in August, which is now looking increasingly likely.”

Viraj Patel at Vanda Research is very confident over an August cut; “Ongoing weakness in goods prices and some services items for May underwhelming. 1or 2 items keeping CPI elevated isn’t a reason to hold rates. Lack of broad persistence means Aug BoE rate cut odds on.”

CBI principal economist Martin Sartorius added; “Today’s data sets the stage for the Monetary Policy Committee to cut interest rates in August, in line with our latest forecast’s expectations.”

ING commented; “For the Bank of England though, it’s services inflation that matters and for the second month in a row, this has come in higher than expected. Investors would be forgiven for feeling a sense of déjà vu after a very similar pattern emerged this time last year, and at the time markets became concerned that the UK had a considerably worse inflation problem than elsewhere.”

The bank expects next month’s data will be important; “Any big surprises here could conceivably cause a further delay. But listening to Governor Andrew Bailey back in May, it sounded like he was keen to get on with the job of cutting interest rates.”

It added; “markets are pricing a 40% chance of an August cut and that seems much too low.”

Credit Agricole doubts the Pound can make further headway in the short term; “We stick with our view that a lot of positives seem to be in the price of the GBP and see downside risks for the currency vs the USD and the EUR from current levels.

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TAGS: Pound Euro Forecasts