Euro to Pound Rate Drops Below 0.83 as ECB Cut Rates Again

October 20, 2024 - Written by Tim Boyer

STORY LINK Euro to Pound Rate Drops Below 0.83 as ECB Cut Rates Again

The ECB cut rates for a third time.

It seems there is a shift of focus from battling inflation to supporting the economy and this would lead to more cuts.

EURGBP made fresh 2024 lows and is approaching the 2022 low of 0.82.

Thursday ECB unfolded as expected as the central bank cut rates for a third time. The move was already priced in to bond markets by up to 95%, but the euro still dropped as it looks like there will be fourth cut this year. EURUSD has unwound the entire August rally back to 1.081, while EURGBP dropped to fresh 2024 lows under 0.83 on Friday.

ECB Goes Full Steam Ahead

Thursday’s cut come just 5 weeks after the last one and the main EU interest rate is now just 3.4%, by far the lowest in the G7 (excluding Japan, of course). To put this in context, rates in the UK are 5.0%. It’s no wonder EURGBP has dropped to new 2024 lows.

The cut itself wasn’t a surprise, but there was an apparent shift in focus which suggests the ECB could be in a hurry to get rates even lower. This is a similar situation to the Fed in its July meeting when there was a subtle but clear shift from focusing on inflation to a focus on its dual mandate. This signalled concern over the economy and a faster easing cycle.

“The decision to cut rates by 25bp only five weeks after the last cut and with only very few pieces of economic data since then suggests that the ECB must have become much more concerned about the eurozone’s growth outlook and the risk of inflation undershooting the target,“ noted ING.

Economic data has been dire for most of the year and PMIs were weaker-than-expected in the last release. With inflation no longer a pressing concern, it appears the ECB are going full steam ahead to try and gets rates either at a neutral or even stimulative level to help the economy.

Of course, the ECB tried to downplay the suggestion they were rushing to help a failing economy, much in the same way the Fed downplayed the reasons for its jumbo-sized 50bps September cut (it was to “maintain strength” rather than save weakness). ING continued,

“Rates were cut again because the ECB thought it could do so, not because it necessarily had to... ECB president Christine Lagarde tried to play down growth concerns and rather emphasised fading inflationary pressure.”

Markets didn’t seem to agree as the euro continued to fall. If the ECB were really cutting solely down to fading inflation, there would be no need for back-to-back cuts and there would be plenty pauses to check inflationary pressures were not returning. After losing a lot of credibility for staying dovish too long as inflation rose, then spending so long battling it, surely the ECB would not want to risk shifting dovish again too quickly. Unless, of course, the economy was struggling and they felt pressure to cut.

Another 25bps looks likely this year and one more cut in early 2025 would get rates under 3%. We don’t quite know where the neutral rate is, yet, but perhaps this would be time for a pause. Of course, this will depend on the data and without any forward guidance from the ECB, markets are left to speculate. More poor data out of the EU could therefore weigh on the euro and EURGBP looks to be heading towards 0.82 and the 2022 low which is a far cry from the 0.87 high made earlier this year.

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TAGS: Euro Pound Forecasts