Pound Sterling Slides to 2-Week Lows vs Euro on ECB Re-Think

November 3, 2024 - Written by David Woodsmith

STORY LINK Pound Sterling Slides to 2-Week Lows vs Euro on ECB Re-Think

The Pound to Euro (GBP/EUR) exchange rate was subjected to very choppy trading following the budget and dipped to 2-week lows near 1.1935.

Following the latest Euro-Zone data and UK budget, expectations of ECB and Bank of England (BoE) interest rate cuts have both been scaled back.

Markets still expect a BoE rate cut in November, but expectations of another cut in December have faded.

This shift in expectations would tend to support both the Euro and Pound, but Sterling has also been unsettled by the UK budget amid a surge in borrowing and sell-off in gilts.

ING commented; “Over the medium term, we are slightly bullish on EUR/GBP because of the market under-pricing the forthcoming easing BoE cycle. And it now seems the UK budget may add to that trend if indeed a modest fiscal risk premium gets priced into the pound.”

Danske Bank commented; “We have long argued that a more expansionary budget could trim markets expectation for a December cut, which today's events have provided support for. We continue to expect a 25bp cut in November and an unchanged decision in December.”

MUFG added; “We are now less confident that the BoE will deliver back-to-back rate cuts in November and December.”

The UK 10-year gilt yield has hit a 12-month high just below 4.45% amid forecasts of higher deficits and strong gilt issuance with further evidence of stresses in the bond market.

ING commented; “it looks as though Labour is sailing very close to the wind with its borrowing plans – with new Gilt supply coming dangerously close to £300bn for FY24/25 and FY25/26. EUR/GBP should be trading a little lower based on short-dated rate spreads and the reason it is not is probably because a modest fiscal risk premium is going back into sterling.”

According to Danske; “Combined with the independent fiscal watchdog, the OBR, adjusting their forecasts lower for growth and higher for inflation, spending and borrowing across the five-year forecast horizon compared to the Spring budget, this proved a poor cocktail for UK assets.”

The bank still expects only a short-lived setback; “We ultimately expect markets to calm again and fiscal support to ease the pressure for BoE easing to provide support for GBP.”

Euro-Zone data on Wednesday was significantly stronger than expected.

Third-quarter GDP was estimated at 0.4% compared with consensus forecasts of 0.2% while Germany also avoided a quarterly contraction with 0.2% growth.

The German inflation data was also stronger than expected with the headline rate increasing to 2.0% for October from 1.6% and compared with expectations of 1.8%.

According to Commerzbank; “The overall inflation rate is even likely to rise slightly in the coming months due to base effects in energy prices.”

The headline Euro-Zone inflation rate increased to 2.0% from 1.7% and slightly above consensus forecasts of 1.9% while the core rate held at 2.7%.

MUFG commented; “The developments have prompted market participants to scale back expectations for the ECB to deliver larger 50bps rate cuts providing support for the euro.”

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TAGS: Pound Euro Forecasts