Pound to Euro Exchange Rate: Weaker Equities Limit Sterling Buying Interest

January 3, 2024 - Written by David Woodsmith

STORY LINK Pound to Euro Exchange Rate: Weaker Equities Limit Sterling Buying Interest

The Pound to Euro exchange rate was unable to hold 1.1565 highs on Tuesday with a retreat to 1.1520 before a fresh advance to 1.1550 on Wednesday.

GBP/EUR will still find it difficult to make significant headway if equities remain under pressure.

The FTSE 100 index traded close to 0.5% lower on Wednesday with a 0.7% retreat for the German DAX index.

The latest Euro-Zone data recorded an increase in German unemployment of 5,000 for December after a revised 21,000 increase the previous month and compared with consensus forecasts of a 20,000 increase.

The main focus will be on US data releases this week, although there will be inflation data from both Germany and the Euro-Zone.

The headline Euro-Zone inflation rate is forecast to increase to 3.0% from 2.4% with the core rate edging lower to 3.5% from 3.6%.

Weaker than expected data would increase pressure for the ECB to cut interest rates on a short-term horizon.

According to Credit Agricole; “A relatively dovish policy stance by the European Central Bank (ECB) and persistent growth concerns in the Eurozone could lead to a weaker Euro (EUR) in 2024.”

MUFG pointed to the latest UK inflation data with the British Retail Consortium (BRC) data recording that shop prices increased 4.3% in the year to December while food-price inflation slowed to 6.7% from 7.8% the previous month.

According to MUFG; “The overall data continues to point compellingly to easing inflation risks. The 6mth annualised rate in the UK to November is now at just 0.6% while the core rate is 2.4%. It is clear that inflation rates are falling now nearly as quickly as they initially increased.”

The next UK inflation data will be released on January 17th.

Conditions within the UK economy will also be a key element.

Following gradual gains from –30 since June, the latest Institute of Directors' (IoD) confidence index dipped to -28 in December from -21 in November.

Expectations for costs and wages remained at +74 and +69 respectively which still suggests significant inflation pressures.

IoD policy director Roger Barker commented that higher interest rates had a negative impact on the economy.

According to Barker; "Although aspects of the business environment have improved in the last couple of months, particularly with regard to inflation, this is not yet exerting a meaningful impact on business decision-making."

Company leaders were, however, more upbeat about prospects for their own businesses with hopes for revenue and export growth rising.

The IoD called on the Bank of England (BoE) to start cutting interest rates in early 2024.

Barker added; "With inflationary pressures abating, business is in dire need of a boost if it is to help drive meaningful economic growth in 2024."

A key consideration is whether there is an impact on BoE policy.

According to MUFG; “However, the BoE is unlikely to alter its rhetoric on monetary policy any time soon and a more notable decline in wage growth will be required before the BoE begins to shift its focus from possibly hiking rates to cutting rates.”

The bank added; “The pound dropped along with all G10 currencies yesterday but was much more resilient against the euro. EUR/GBP has failed to sustain levels above the 0.8700-level and policy divergence versus the ECB should help support GBP versus non-dollar currencies.”

Latest data from the CFTC recorded a decline in long, non-commercial Sterling positions to 14,100 contracts from 19,900 the previous week.

In contrast, there was a net increase in long Euro positions to 117,400 from 114,600 the previous week.

The overall positioning should limit the scope for Pound selling against the Euro.

The German 2-year yield traded at 2.46% on Wednesday from 3.04% in early November with the UK 2-year yield around 4.10%.

Overall yield spreads will also tend to limit the scope for Pound Sterling selling.

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TAGS: Pound Euro Forecasts