Rampant Pound Takes a Break, GBP to EUR Rate at 2-Year Best

September 29, 2024 - Written by John Cameron

STORY LINK Rampant Pound Takes a Break, GBP to EUR Rate at 2-Year Best

After a surge earlier in the week, the Pound was subjected to a correction on Wednesday, although overall sentiment held firm, especially with the dollar struggling as EUR/USD broke above the 1.12 level for the first time since July 2023.

The Pound to Euro (GBP/USD) exchange rate retreated to near 1.1960 from 2-year highs just above 1.2020 recorded on Tuesday.

1.20 will remain an important resistance area for the Pound.

Danske Bank noted solid fundamentals; “Markets have scaled back on their expectations of rate cuts from the BoE, the UK economy has continued to hold up fairly well and risk sentiment has improved.”

Bank of England Monetary Policy Committee (MPC) member Greene maintained a hawkish policy stance.

According to Greene; "I believe a cautious, steady-as-she-goes approach to monetary policy easing is appropriate.”

She welcomed progress on inflation, but still voiced caution and added; “We’re not surprised that it’s sticky. The biggest component of services inflation is labor, so as wages come down, hopefully inflation will come down.”

Although she thought that the central bank’s middle inflation projection was the most likely outcome she saw upside risks.

She also noted concerns that consumer spending could rebound; "I believe the risks to activity are to the upside, which could suggest that the long run neutral rate is higher and - all else equal - our stance of policy isn’t as restrictive as we had thought.”

There was some speculation that Pound strength would curb import prices and put downward pressure on inflation and allow faster rate cuts.

Commerzbank was sceptical given services-sector pressures; “GBP would probably need to appreciate much more for the persistently high services inflation to narrow the gap between the core rate and the target.”

Although monetary policy trends were seen as positive for the Pound, there is some unease over fiscal policy developments.

According to Jane Foley, senior forex strategist at Rabobank; "I think sterling is perhaps facing quite a difficult hurdle in the shape of the October 30th UK budget as there is a clear anticipation that the country will face more tax hikes.”

She added; "It does feel that investor sentiment has perhaps become more worried about the possibility of tax hikes in this budget."

MUFG noted further speculation over more aggressive ECB rate cuts after a run of dismal data.

The bank commented; “Even if the ECB decides to skip cutting rates again in October, market participants are likely to anticipate that it is only a matter of time before the ECB has to speed up rate cuts by delivering a larger 50bps in December. The negative development will help to put a dampener on further upside for the euro.”

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TAGS: Pound Euro Forecasts