Pound to Euro Outlook: Scope to 1.1630 say ING Analysts

January 4, 2024 - Written by Frank Davies

STORY LINK Pound to Euro Outlook: Scope to 1.1630 say ING Analysts

The Pound to Euro (GBP/EUR) exchange rate posted net gains on Wednesday with a test of the 1.1600 level and corrections were very limited.

The latest UK data releases suggested that the economy was more likely to steer away from recession, especially as a further decline in mortgage rates should help underpin the housing sector.

With evidence that the Euro-Zone economy is still struggling, GBP/EUR hit 2-week highs just above 1.1610 before settling just below the 1.1600 level.

The final reading for the UK PMI services-sector index was revised higher to a 6-month high of 53.4 from the flash reading of 52.7 and compared with the November reading of 50.9.

Orders increased on the month and business confidence increased to a 7-month high, although there was a small decline in employment, the third decline in four months.

The overall rate of output price inflation accelerated to a 5-month high.

The Bank of England will be monitoring inflation pressures closely and will be uneasy over the threat of persistent inflation within the services sector.

Tim Moore, Economics Director at S&P Global Market Intelligence, which compiles the survey, commented; "December data indicated that the UK service sector ended last year on a high, with business activity growth accelerating to its fastest for six months as the turnaround in order books gained momentum.

He added; "Strong wage pressures fuelled another month of substantial input cost increases in the service sector. Overall input price inflation picked up for the second month running, despite relief from lower transport bills and raw material costs. The latest survey indicated a robust rise in prices charged across the service economy amid efforts to defend margins, with the rate of inflation the fastest since last July."

ING is confident that inflation pressures are easing, but added; “Markets are pricing the first rate cut from the Bank of England in May, which feels a bit early. We also think when rate cuts do begin – potentially in August – they will be a little more gradual than markets are currently pricing.”

As far as the housing sector is concerned, mortgage approvals increased to just above 50,000 for November from a revised 47,900 the previous month.

There was a £2.0bn increase in net lending for the month with a strong increase in consumer credit.

According to the Bank of England, the annual growth rate for all consumer credit continued to increase, and is now at 8.6% in November, the highest since September 2018.

As far as the Euro-Zone is concerned, the PMI services-sector index was revised to a final 48.8 from the flash reading of 48.7 and the strongest reading for five months.

Business activity, new orders and employment remain in contraction, but confidence edged up.

Although the rate of increase in expenses declined to a 4-month low, private sector companies hiked their prices more aggressively, however, with the rate of output charge inflation accelerating to a six-month high.

According to Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank; “It's not quite recession territory yet for services, but the vibe is far from growth-oriented. There are a lack of clear signals indicating an imminent return to robust expansion. The Composite PMI, a reliable indicator of overall economic performance, is sounding the recession alarm for the Eurozone.”

The services-sector inflation pressures will cause concern within the ECB.

de la Rubia added; “Sales prices, in fact, saw a noticeable increase in December, and at a slightly elevated pace. This will go against those members of the European Central Bank who are inclined to cut rates already in March. We expect a first rate cut in June.”

According to ING; “We could see some EUR performance emerging in the crosses in the short run but some improvement in the eurozone economic outlook remains necessary to make any EUR rally sustainable.”

ING does see scope for GBP/EUR to move to 1.1630.

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TAGS: Pound Euro Forecasts