Euro to Pound Exchange Rate Forecast: EUR/GBP Firm Ahead of Latest UK Inflation Test

September 18, 2024 - Written by John Cameron

STORY LINK Euro to Pound Exchange Rate Forecast: EUR/GBP Firm Ahead of Latest UK Inflation Test

The Pound to Euro (GBP/EUR) exchange rate secured a net gain to 1.1870 on Tuesday and close to 10-day highs.

Weak German data hampered the Euro while expectations of no change in Bank of England interest rates this week supported the Pound.

Equities have also made headway over the past 24 hours with markets optimistic over the potential for a 50 basis-point interest rate hike.

The FTSE 100 index hit 2-week highs and overall risk conditions helped support Sterling.

At this stage, there are very strong expectations that the Bank of England will hold interest rates at 5.00%, but the latest UK inflation data will be released on Wednesday and could have an important impact on market expectations.

Consensus forecasts are for the headline rate to remain at 2.2% for August while the core rate is expected to increase to 3.5% from 3.3%.

The BoE is likely to watch the core data very closely with a particular focus on the services sector.

A stronger than expected release would make it even less likely that the BoE would be willing to sanction a rate cut this week.

There will, however, be additional pressure for action if there is a weaker than expected reading for core inflation.

Andrew Goodwin, chief UK economist for Oxford Economics, commented; “most members of the MPC are likely to be content to sit back and reassess the situation in November, a meeting at which the MPC will update its forecasts to incorporate the impact of the budget.”

He added; “We think that fiscal event will be the factor most likely to push the MPC off the gradual loosening path that it advocated in August.”

Danske Bank sees a potential Pound move lower on Thursday, but expects longer-term GBP/EUR gains; “we more generally still expect EUR/GBP to continue its recent move lower driven by UK economic outperformance, BoE lagging peers in an easing cycle for the time being and tight credit spreads. The key risk is policy action from the BoE.”

As far as the Euro-Zone is concerned, the German ZEW economic sentiment index declined sharply to 3.6 for September from 19.2 the previous month and well below consensus forecasts of 17.0.

The current conditions component also deteriorated to -84.5 from -77.3 and below expectations of -80.0. There was a slightly more modest decline in the Euro-Zone index.

According to ZEW President Professor Achim Wambach; “The hope for a swift improvement in the economic situation is visibly fading. Although the falling economic expectations for the eurozone point to an overall rise in pessimism, the drop in expectations for Germany is significantly greater.”

ING commented; “the euro’s strong momentum has gone through several concerning eurozone activity prints, and the ZEW should merely confirm the widely-priced notion that Germany’s outlook remains grim.”

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TAGS: Pound Euro Forecasts