Inflation Slide Hurts Single Currency, Pound Sterling to Euro Exchange Rate Hits 5-Week Best

September 2, 2024 - Written by David Woodsmith

STORY LINK Inflation Slide Hurts Single Currency, Pound Sterling to Euro Exchange Rate Hits 5-Week Best

There has been significant divergence in currency markets on Thursday with significant gains for the Australian and New Zealand dollars while the Euro has come under pressure following the release of weaker-than-expected inflation data.

To some extent the Pound has been caught in the middle, along with the dollar, but the Pound to Euro (GBP/EUR) exchange rate has made further headway with 5-week highs fractionally below the 1.1900 level.

UK equities posted net gains despite a Wall Street setback which also helped underpin the Pound in global markets.

A key factor is still that markets expect both the Federal Reserve and the ECB to cut interest rates more aggressively than the Bank of England (BoE).

ING commented; “Driving sterling higher has been the malaise both in the eurozone and now emerging in the US, too, combined with the BoE's reticence to signal a full-blooded easing cycle. Warmer relations with Europe might have helped, but this is harder to quantify.”

At this stage, there are no speeches scheduled by BoE rate setters in the short term, limiting any potential shift in expectations.

Markets are also continuing to discuss UK fiscal policy, especially given strong expectations of tax increases in the October budget.

ING considers that concerns may be over-stated; “There is much speculation over £20bn of tax increases coming through - worth around 0.7% of GDP. However, this may not represent fiscal tightening since she will be using the money to address the real-terms cut in public spending under the previous Conservative government. Public sector pay rises alone may be worth as much as £10bn.”

The bank added; “For sterling, that may mean this is a fiscally neutral budget and one that could see the pound continue to outperform.”

The latest Spanish inflation data recorded a decline in the headline rate to 2.2% from 2.8% previously and below market expectations of 2.4%.

The latest German inflation data will be released later in the day and the headline rate is forecast to decline to 2.1% from 2.3%.

Data from individual states, however, suggests that there will be a lower than expected figure and a significant undershoot would spark fresh speculation over more aggressive ECB interest rate cuts.

The latest Euro-Zone business and consumer survey improved to 96.6 from 96.0 previously.

There has, however, been no net improvement in confidence this year with subdued growth continuing.

Rabobank also considers that Euro gains will be self-defeating as the ECB would be more likely to cut rates.

It noted; “If a stronger EUR triggers expectations that the pace of ECB rate cuts could be hastened, this will have an automatic moderating impact on the value of EUR/USD.”

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TAGS: Pound Euro Forecasts