China Rate Cut Offers Some Euro Protection, Pound to Eur Rate Settles

October 22, 2024 - Written by David Woodsmith

STORY LINK China Rate Cut Offers Some Euro Protection, Pound to Eur Rate Settles

After hitting 30-month highs just above 1.2050 last week, the Pound to Euro (GBP/EUR) exchange rate has lost ground on Monday and settled just below 1.2000.

The Chinese central bank cut interest rates on Monday with the prime loan rate cut to 3.10% from 3.35%.

Although markets had expected a cut, the move did help underpin confidence in the Chinese outlook and provided an element of Euro support. Major reservations over the internal Euro-Zone outlook will still limit any Euro support.

Markets will be monitoring geo-political developments closely this week with central bank rhetoric and evidence on economic trends also crucial elements.

ING commented; “We've had a bullish view on EUR/GBP this year, largely because we had felt that the market was mispricing the Bank of England cycle. We still believe that to be the case, but the problem is that the ECB cycle has moved substantially to the downside too as the ECB has proved more dovish than we were expecting.”

Governor Bailey is scheduled to speak four times during the week and comments from other MPC members will also be significant.

ING added; “We still think the market is under-pricing the pace of the BoE easing cycle – and should Bailey add to some of his rare comments that the BoE could become more 'activist' in its easing, sterling could come under pressure.”

MUFG noted more dovish comments from BoE Governor Bailey recently and added; “The developments support our forecast for the BoE to cut rates at both the November and December MPC meetings. A faster pace of BoE easing could take some shine of the GBP which has been the best performing G10 currency this year although it has held up well this week.”

According to Danske; “This week, we will have a range of BoE speakers out from both the dovish and hawkish camp likely to shed some light on how the MPC views the string of data released last week.”

It added; “BoE policy action remains the biggest risk to our call of a stronger GBP.”

Within Europe, the latest business confidence data will also be important for policy expectations.

ING commented; “Thursday's release of the UK PMI should also have a big say on whether sterling continues to out-perform or perhaps succumbs to some dovish BoE rhetoric.”

The bank added; “Lagarde surprised some last Thursday by elevating the importance of the PMIs in ECB decision-making.”

Weak data would increase demands for a large ECB rate cut in December.

Rabobank commented on ECB President Lagarde’s comments last week; “the message on growth was clearly more of a concern than she was willing to admit and the need to get the neutral policy stance sooner rather than later leaving the market with a will to price in the possibility of an outsized cut as soon as December.”

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TAGS: Pound Euro Forecasts