GBP/EUR Exchange Rate Recovers to 1-Week Best

August 13, 2024 - Written by John Cameron

STORY LINK GBP/EUR Exchange Rate Recovers to 1-Week Best

The Pound to Euro (GBP/EUR) exchange rate has continued to recover from 3-month lows below 1.1600 and traded near 1.1690 on Monday.

The latest COT data, released by the CFTC, recorded a further sharp decline in long, non-commercial Pound positions to below 75,000 contracts from 111,000 the previous week and close to a 50% decline from the record high in late July.

In historic terms, long positions are still high, but with a reduced risk of aggressive Pound selling in global markets.

Risk conditions have dominated over the past week, but there is a greater chance that domestic fundamentals will lead Pound moves this week, especially as there will be implications for interest rate expectations.

MUFG commented; “The releases of the latest UK labour market report (Tues), CPI report for July (Wed) and GDP report for Q2 (Thurs) will be important in helping the BoE to further assess inflation persistence risks in the UK. September rate cut expectations would have to intensify to prevent the pound from rebounding further this week if financial markets continue to stabilize.”

As far as the labour-market is concerned, markets expect the unemployment rate will increase to 4.5% in the three months to June from 4.4% previously which would be the highest reading since October 2021.

Wages data will also be important with consensus forecasts of a sharp decline in the annual increase to 4.6% from 5.7% previously due in part to favourable base effects.

If confirmed, this would be the slowest annual increase for two years.

According to the Chartered Institute of Personnel and Development (CIPD) British employers expect to raise wages by 4% over the coming 12 months, little changed from the previous quarterly survey, with greater resistance to higher labour costs.

James Cockett, labour market economist at the CIPD, commented; "While employers' pay rise expectations remain above pre-pandemic levels, we would expect them to adjust their plans for pay rises in the coming months, as inflation falls and the labour market continues to slow."

For inflation, the headline rate forecast to increase to 2.3% from 2.0% with the core rate edging lower to 3.4% from 3.5%.

ING expects weaker than expected readings for employment and services-sector inflation.

It added; “We think the market is pricing the Bank of England rate cycle a little too conservatively for the rest of this year.”

In this context, it expects a soft tone for the Pound with solid GBP/EUR resistance in the 1.1700-1.1765 band.

Some BoE members are still concerned over inflation trends.

In comments over the weekend, external member Mann stated; “There is an upwards ratchet to both the wage setting process and the price process and it may well be structural, having been created during this period of very high inflation over the last couple of years.”

Mann, did, however, state that her measure of hawkishness has moderated to a reading of 7 from 10 at the beginning of 2024 as pressures have eased.

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TAGS: Pound Euro Forecasts