European Interest Rate Cuts Continue, Pound to Euro Rate Near Multi Year Highs

December 13, 2024 - Written by David Woodsmith

STORY LINK European Interest Rate Cuts Continue, Pound to Euro Rate Near Multi Year Highs

The ECB and Swiss interest rate cuts maintained underlying demand for the Pound, although there was also an element of profit taking on short Euro positions which capped Pound buying.

The Pound to Euro (GBP/EUR) exchange rate traded around 1.2140 and close to the 33-month high just above 1.2155 recorded on Wednesday.

The Pound to Swiss franc (GBP/CHF) exchange rate hit 6-week highs at 1.1350 before a retreat to 1.1310.

Overall yield trends are continuing to underpin the Pound.

Pepperstone strategist Michael Brown commented; “Euro-sterling moving lower makes sense. The economic outlook in the UK looks pretty grim but I think the euro zone is the only place where it's actually worse."

According to Scotiabank; “the broader trend in EURGBP remains strongly negative.”

The ECB cut interest rates by 25 basis points at the latest policy meeting with the deposit rate lowered to 3.00%.

The decision was in line with consensus forecasts, although there were some banks that were expecting a larger 50 basis-point rate cut.

Bank President Lagarde stated that risks to growth were still on the downside.

ING commented; “today’s decision reflects a compromise between growth and inflation worriers, a gut feeling vs a model-based approach and doves against hawks. At the same time, the ECB has dropped the reference to still-needed restrictiveness, keeping the door wide open for more rate cuts to come.”

Earlier, the Swiss National Bank (SNB) cut interest rates by more than expected with a 50 basis-point cut to 0.50%.

The SNB cited a further decline in inflation pressure to justify the move and warned that it was ready to be active in currency markets.

ING sees only limited scope for further cuts given the proximity to zero.

It added; “The SNB will not want to take rates back to the -0.50/075% area – despite what they say currently. Negative rates were seen to have been a contributing factor to Credit Suisse travails.”

Domestically, the RICS housing index strengthened further to 25% for November from 16% the previous month which was above consensus forecasts of 19% and the strongest reading since September 2022.

RICS senior economist Tarrant Parsons commented; "Although the latest survey results continue to signal a steady improvement in buyer demand across the residential market, the broader macro environment is likely to pose additional headwinds moving forward."

Markets expect the Bank of England will hold interest rates at 4.75% next week, but there are reservations over the 2025 outlook.

According to Pepperstone's Brown; "There's a risk that we get to the first quarter of next year and the BoE end up panicking as a result of a significantly weaker labour market."

He added; “We could end up with a much more aggressive pace of easing that markets aren't pricing and that could be a headwind for the pound to deal with early next year."

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TAGS: Pound Euro Forecasts