ECB Decision Day: GBP/EUR Needed Very Dovish Talk to Break Back Above 1.20

October 18, 2024 - Written by Frank Davies

STORY LINK ECB Decision Day: GBP/EUR Needed Very Dovish Talk to Break Back Above 1.20

The Pound to Euro (GBP/EUR) exchange rate found support below 1.1950 on Wednesday and settled around 1.1965. Unless there is very dovish ECB rhetoric, GBP/EUR could retreat later in the session.

Interest rate decisions and expectations surrounding the Bank of England (BoE) and ECB will remain key elements for the Pound with markets also monitoring geo-political developments.

The immediate focus will be on the ECB with strong expectations of a rate cut today which would be the first back-to-back cut for 13 years.

There are also strong expectations of a further cut in December and a succession of cuts next year.

MUFG notes expectations of a succession of ECB cuts; “with the policy rate expected to fall back to or just below 2.00% next year. It provides a high hurdle for a dovish policy surprise from the ECB today.”

According to ING; “Our economists believe that the ECB will find enough reason to cut this week and not disrupt markets. But the case for a cut and then a follow-up in December is not straightforward.”

ING added; “Geopolitical risks and potential knock-on effects to energy prices could also make the ECB more wary about hinting too much at further easing. As our economists note, the ECB has become increasingly concerned about the growth outlook but is still very reluctant to give the all-clear on inflation.”

Given the risk that dovish expectations could be disappointed, ING sees scope for temporary Euro relief and limited GBP/EUR losses.

Following the latest UK inflation data, markets are pricing in close to an 80% chance of two Bank of England rate cuts by the end of 2024.

Paul Dales, chief UK economist at Capital Economics, agrees that a November BoE cut is a done deal.

He added; “The chances of that being immediately followed by another 25bps cut at the following meeting in December has just gone up. At the moment, though, we think the Bank will keep rates on hold at the meeting.”

One rate cut this year would support the Pound.

The 2025 fiscal and monetary policy outlooks will be crucial with markets also continuing to digest Wednesday’s UK inflation data.

Danske Bank commented; “We expect the BoE to stick to the gradual approach delivering quarterly cuts until next year, where we expect a cut at every meeting for the first half of the year, leaving the Bank Rate at 3.25% at YE 2025.”

Danske added; “For EUR/GBP the key will be developments in relative growth prospects between the euro area and the UK as well as BoE guidance, with a range of speakers out next week. We continue to forecast a stronger GBP over the coming months.”

Capital Economics’ Dales expects the BoE will cut to 3% next year, limiting longer-term Pound support.

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Euro Forecasts