The Pound to Euro Rate Consolidates Below 11-Month Best

July 16, 2024 - Written by John Cameron

STORY LINK The Pound to Euro Rate Consolidates Below 11-Month Best

The Pound to Euro (GBP/EUR) exchange rate hit 11-month highs at 1.1920 on Monday before consolidating around 1.1895 on Tuesday.

COT data released by the CFTC reported a fresh surge in long, non-commercial Sterling positions to just under 85,000 in the latest week from 62,000 the previous week and the largest long position on record.

As far as Euro positioning is concerned, there was a small net positive position after a net short position previously.

The positioning overall will make it difficult for the Pound to secure further support and will leave it vulnerable to a sharp correction if there is a shift in expectations.

In this context, Wednesday’s UK inflation data will be potentially important.

Consensus forecasts are for the headline rate to decline marginally to 1.9% from 2.0%, which would be the lowest rate since May 2021.

The core rate is also expected to edge lower to 3.4% from 3.5%.

A weaker than expected set of data would revive expectations of an August Bank of England rate cut and potentially trigger a sharp Pound correction.

Stronger than expected data would be likely to shut the door on August rate hike and support the UK currency, although gains may be limited given the positioning.

As far as the Euro-Zone is concerned, there are strong expectations that the ECB will hold interest rates at 4.25% at this week’s meeting.

The ECB is in holiday mode and communication is likely to be limited, but markets will still be watching forward guidance closely.

According to the latest ECB survey 16% of lenders reported an increase in demand for loans from households, the first increase since 2022. In contrast, there was a further tightening in corporate credit conditions.

The German ZEW investor confidence index retreated to 41.8 for July from 47.5 previously, but slightly above consensus forecasts of 41.2.

The current conditions component improved to -68.9 from -73.8 previously and compared with market expectations of -74.3.

The Euro-Zone index dipped to 43.7 from 51.3 previously and the data overall suggests that the economy is struggling to make headway.

ING commented; “That may ultimately contribute to avert a hawkish tilt by the ECB at this week’s meeting despite some lingering inflation concerns.

Wariness over the economy would maintain expectations of a September rate cut and curb Euro support.

The French political situation will also continue to be watched closely.

ING looked at the underlying fiscal dynamics as parliamentary negotiations continued. It noted that the State auditor Cour des Comptes, stated that the plans to fix public finances lacked credibility and relied on rather optimistic growth forecasts.

According to ING; “the ongoing political gridlock is hardly good news, especially as socialist parties may well require higher public spending in some parts of the economy as part of a deal to form a working coalition with President Macron.”

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TAGS: Pound Euro Forecasts