ECB Cut: GBP/EUR Exchange Rate Retreats from 20-Day Highs on Euro Shorts

January 31, 2025 - Written by Tim Boyer

STORY LINK ECB Cut: GBP/EUR Exchange Rate Retreats from 20-Day Highs on Euro Shorts

The ECB policy decision was in line with expectations, but the Euro (EUR) managed to pare losses against the US Dollar (USD) and Pound Sterling (GBP) with an element of short covering amid a slightly less pessimistic tone on the economic outlook.

The Pound to Euro exchange rate (GBP/EUR) hit 20-day highs just above 1.1960 earlier in the session before settling around 1.1925 after the ECB policy decision.

The ECB lowered the deposit rate by 25 basis points to a 22-month low of 2.75% which was in line with consensus forecasts.

The central bank is confident that inflation will reach the 2% target this year, while policy decisions will be data-dependent.

Bank President Lagarde stated that the Euro-Zone economy will remain weak in the short term, with risks still biased to the downside, but there is scope for a rebound later in the year.

According to flash data, Euro-Zone GDP was unchanged in the fourth quarter of 2024 compared with expectations of a 0.1% increase for the quarter.

There was, however, a tentative recovery in business confidence for January which will offer some encouragement.

As far as UK data is concerned, mortgage approvals increased slightly to 66,500 for December from 66,100 the previous month and above consensus forecasts of 65,000.

Overall, consumer borrowing increased over the month with a more substantial increase in consumer credit.

On Wednesday, the Bank of England (BoE) announced a new facility to support the UK bond market in the event of market dislocation.

The BoE will lend cash to non-bank financial institutions if there are stresses in the market.

ING commented, “While these efforts to restore confidence are very welcome – and have helped the sterling trade-weight index recover about 1% from lows earlier this month – we still feel sterling is vulnerable.”

The bank expects that fiscal policy will have to be tightened in the March budget with a tighter policy and lower inflation triggering four BoE rate cuts this year which will undermine the Pound.

Jane Foley, head of FX strategy at Rabobank, commented, "Potential investors in UK plc are still confronted by headwinds that include high energy prices, high interest rates and the forthcoming hikes in taxation and minimum wages.”

A Bank of England rate cut next week would undermine Pound yield support, but there could be a boost to business confidence which could help underpin currency sentiment.

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Pound Euro Forecasts