Pound Euro Exchange Rate: "There are many reasons to be underweight in the euro"

December 5, 2024 - Written by Tim Boyer

STORY LINK Pound Euro Exchange Rate: "There are many reasons to be underweight in the euro"

The Pound to Euro (GBP/EUR) exchange rate has held comfortably above 1.2000 and secured a net gain to around 1.2070. The pair was on track for the seventh successive daily gain amid increased fears over Euro-Zone stagflation.

According to ING; “Be it European political risk, weak activity, the threat of trade wars or energy prices creeping higher (EU gas inventories are starting to come under pressure) there are many reasons to be underweight in the euro.”

MUFG expects GBP/EUR gain to 1.2120 early next year.

Political concerns have undermined French bonds, especially with fears that the main casualty will be a lack of action to curb the budget deficit.

French bonds have remained under pressure with the yield premium over German bunds widening to a 12-year high.

The National Assembly no-confidence debate is due to start around 15.00 GMT with a potential vote after the European close.

Prime Minister Barnier has stated that he could survive, but there are very strong expectations that he will lose.

If defeated, Macron could ask Barnier to stay on in a caretaker role before attempting to name a new Prime Minister while there is no mechanism for early elections.

MUFG commented; “The caretaker government will likely rely on untested emergency legislation to collect taxes and delver minimal spending it considers vital while French President Macron attempts to put together another government with no new legislative election allowed until July.”

It added; “The unfavourable political developments in France continue to pose a downside risk for the euro although are not necessarily sufficient to trigger another leg lower on their own.”

Economic developments will also be important ahead of next week’s ECB policy decision with confidence remaining very fragile.

The final reading for the Euro-Zone PMI services-sector index was revised to 49.5 from the flash reading of 49.2, but this was below the October reading of 51.6 and the lowest reading for 10 months.

Business confidence was also a 12-month low and below the long-term average. Despite weak demand, there was stronger upward pressure on prices.

Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, commented; “Stagflation is a pretty nasty word, especially if you are a central banker, but that is what is hitting the eurozone right now. In November, the economy started shrinking while the PMI price components went up for the second month in a row.”

The UK PMI services-sector index was revised to 50.8 for the final reading from the flash reading of 50.0, but this was still a 13-month low.

Overall business confidence also dipped to a 23-month low amid unease over cost pressures.

There was stronger upward pressure on costs and service charges increased at the fastest rate for four months.

The UK data will also trigger some concerns over UK stagflation risks, limiting the potential for very strong Pound support.

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TAGS: Pound Euro Forecasts