Pound to Euro Back Above 1.2000, Analyst Target 1.2050+

November 22, 2024 - Written by David Woodsmith

STORY LINK Pound to Euro Back Above 1.2000, Analyst Target 1.2050+

The stronger than expected UK inflation data strengthened the Pound on Wednesday with the Pound to Euro (GBP/EUR) exchange rate edging back above the 1.2000 level from 1.1980 as markets priced out the already small possibility of a December Bank of England rate cut.

Markets still expect significant rate cuts next year.

According to ING on EUR/GBP; “For the short term, we stick with our call that the pair will move back below 0.830.” (GBP/EUR above 1.2050).

MUFG commented; “With the Resolution Foundation estimating that the UK jobs data is has undercounted employment by almost 1 million people, the need for BoE caution is even greater. In today’s markets EUR/GBP moving lower makes more sense that GBP/USD moving higher.”

The headline UK inflation rate increased to 2.3% for October from 1.7% and slightly above consensus forecasts of 2.2%.

The core rate increased to 3.3% from 3.1% and compared with expectations of a decline to 3.1%.

According to the ONS, the largest upward contribution to the monthly change came from housing and household services, mainly because of electricity and gas prices.

The largest offsetting downward contribution came from recreation and culture.

The goods inflation rate increased to -0.3% from -1.4% previously while the services-sector rate edged higher to 4.9% from 5.0%.

Electricity prices rose by 7.7% in October, having fallen by 7.5% last year. Air fares also registered the sharpest monthly increase for at least 20 years.

Ruth Gregory, deputy chief UK economist at Capital Economics, commented; “Much of this overshoot in core inflation and services inflation was due to a sharp rise in airfares inflation, which the Bank won’t consider a sign of stickier price pressures.”

Nevertheless, she added; “it suggests that, barring a major downside surprise in November’s inflation data, the Bank will almost certainly leave rates unchanged at 4.75% at its next meeting in December.”

According to Luke Bartholomew, deputy chief economist at abrdn; “with the budget set to boost growth and inflation next year, there is little reason for the Bank to deviate from its only gradual rate cutting schedule any time soon. So we continue to expect the next rate cut early next year.”

ING considers that the underlying evidence is more favourable; “The Bank of England likes to strip those things out and focus on so-called “core services” inflation. There’s no single definition, but our favoured measure fell from 4.8% to 4.5%. That’s quite a different story from what the headline services number is telling us.”

It added; “We think that means the Bank of England can in time become more aggressive on cuts. Timing that isn’t easy, but we think a rate cut in February, followed by another in March (and back-to-back cuts thereafter) is still a reasonable base case.”

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TAGS: Pound Euro Forecasts