Hawkish ECB Rhetoric Protects the Euro Exchange Rates

November 28, 2024 - Written by Frank Davies

STORY LINK Hawkish ECB Rhetoric Protects the Euro Exchange Rates

The Pound to Euro (GBP/EUR) exchange rate tested the 1.2000 level in early Europe on Wednesday before a retreat to 1.1980 on hawkish ECB rhetoric.

The Pound overall has still been resilient amid underlying reservations surrounding the Euro-Zone economy amid another weak German data release.

ING expects that EUR/GBP will trade around 0.83 at the end of 2024, but added; “the risk to that forecast probably lies more to 0.82 than 0.84 since the UK is less exposed on the trade side and the BoE has yet to abandon its concern over late-cycle inflation.”

The bank, therefore, sees a greater risk of GBP/EUR gains to 1.22 rather than a slide to 1.19.

The Euro gained some support from the announcement of a ceasefire between Israel and Hezbollah in Lebanon, especially with hopes for weaker energy costs.

Danske Bank commented; “The Israel-Hezbollah ceasefire naturally constitute a positive supply shock as evident from the lower oil price.”

There are still important reservations surrounding US trade policies with the risk that the Euro will be more vulnerable than the Pound.

Interest rate trends and expectations will remain a key element for currencies.

In comments on Wednesday, ECB Council member Schnabel stated that she saw only limited room for further interest rate cuts.

She added that she needed to see services-sector inflation come down and that the impact of past ECB tightening is fading visibly.

According to Schnabel, there was not a significant risk of an inflation undershoot and the central bank may not be so far from neutral rates.

Schnabel is one of the most hawkish members of the ECB council, but there was a significant impact on expectations.

In response, markets considered the chances of a substantial December interest rate cut had faded with just over a 70% chance that there would be a smaller 25 basis-point cut at next month’s meeting.

The shift in expectations had a significant impact in underpinning the Euro in global markets.

Overall confidence in the Euro-Zone outlook remained weak with particular concerns over Germany and there will be dovish voices within the ECB.

The GfK/NIM consumer confidence index retreated to a 7-month low of -23.3 for December from -18.4 previously and below consensus forecasts of -18.8.

Rolf Bürkl, consumer expert at NIM commented; “Consumer uncertainty has increased again recently, as evidenced by the rising willingness to save.”

He added; “There is also another uncertainty factor: concerns about job security in Germany are growing. The reasons for this are certainly the job cuts reported by industry and the relocation of production abroad. In addition, the number of insolvencies has risen recently. In short, the consumer climate remains poor.”

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TAGS: Euro Forecasts