Pound to Euro Exchange Rate: Sterling Unable to Hold Above 1.19

July 26, 2024 - Written by John Cameron

STORY LINK Pound to Euro Exchange Rate: Sterling Unable to Hold Above 1.19

The Pound to Euro (GBP/EUR) exchange rate has been unable to hold above 1.1900 and settled around 1.1885.

Although data releases have triggered further concerns surrounding the Euro-Zone economy, there are wider currents in global markets with a risk-off trend and sharp dip in equities and risk aversion which has undermined the Pound and provided some Euro protection.

The Pound has been broadly resilient, but GBP/EUR will be more vulnerable if equities continue to lose ground, especially as market speculation over a Bank of England (BoE) rate cut would build.

The German IFO business confidence index retreated to a 3-month low of 87.0 for July from 88.6 previously, well below consensus forecasts of 88.9.

There were significant monthly declines in both the current assessment and business expectations components.

The data, following weaker than expected PMI business confidence data on Wednesday, will reinforce concerns over the outlook.

According to the IFO Institute; “Scepticism regarding the coming months has increased considerably. The German economy is stuck in crisis.”

There are, however, shifting dynamics in global markets with increased reservations surrounding the US outlook.

There has also been a substantial yen recovery amid a liquidation in carry trades funded through the Japanese currency.

Equities have moved lower with sharp losses for the former tech darlings. The Nasdaq 100 index fell by a further 3.7% with a 7% decline over the past two weeks.

MUFG commented; “The deterioration investor risk sentiment was again evident overnight with the US equity markets suffering their largest one-day loss since 2022. It was driven by a correction lower for US tech stocks.

It added; “The broad-based reversal of crowded trades is spilling over into the FX market over the summer period.”

Monetary policy trends will continue to be important for underlying trends.

As far as the BoE is concerned, a majority of investment banks expect the Bank of England will cut interest rates at next week’s policy meeting, but markets are pricing in less than a 50% chance of a cut.

The Pound will be vulnerable to selling if markets become more confident that the BoE will act next week.

ECB monetary policy will also be under review.

ING commented; “In its last meeting, the ECB put more emphasis on near-term growth concerns than in previous meetings and these PMIs resonate with that narrative.”

Commerzbank commented on the PMI data; “Today's weak figures put a question mark over a noticeable economic recovery expected by many forecasters for the second half of the year.”

It added; “Both the weak momentum in the sentiment indicators and the assessment of service prices are likely to encourage the ECB to cut key interest rates again in September.”

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TAGS: Pound Euro Forecasts