Pound to Euro FX Outlook: The key GBPEUR level to watch is 1.1765

February 1, 2024 - Written by John Cameron

STORY LINK Pound to Euro FX Outlook: The key GBPEUR level to watch is 1.1765

The Pound to Euro exchange rate dipped sharply to lows at 1.1670 on Tuesday after slightly better-than-expected Euro-Zone data, but traded back above 1.1700 on Wednesday.

The UK data releases have been generally favourable which has helped underpin the Pound while initial Euro-Zone inflation releases have been weaker than expected which limited scope for a further Euro rebound.

The key level to watch for GBP/EUR is 1.1765.

The Lloyds Bank business barometer strengthened to 44 for January from 35 the previous month and the highest reading for close to two years.

It was also the strongest January reading since 2016.

Companies were more optimistic over hiring plans, but there was some evidence of wage moderation the with proportion of firms expecting to increase wages by more than 4% declining to a 5-month low.

As far as pricing trends are concerned plans to increase prices declined posted a back-to-back decrease for the first time since June 2022.

Hann-Ju Ho, Senior Economist at Lloyds Bank Commercial Banking commented; "With ongoing geopolitical issues and a general election on the horizon, businesses will have factored these into their risk radars and will be working to prepare for any potential impacts on their trading prospects."

She added; "Also, half of all companies say they’re planning to increase headcount in the coming year. Despite that and the changes to minimum wage that will come into force in April, expectations for staff pay fell back following last month’s increase."

Wages data will come as some relief to the Bank of England.

According to the latest Nationwide data, house prices increased 0.7% for January on a seasonally-adjusted basis after no change the previous month and compared with market expectations of no change for the month.

The annual decline slowed to 0.2% from 0.8% previously.

Nationwide's Chief Economist Robert Gardner noted the crucial importance of mortgage rates and commented; “There have been some encouraging signs for potential buyers recently with mortgage rates continuing to trend down. This follows a shift in view amongst investors around the future path of Bank Rate, with investors becoming more optimistic that the Bank of England will lower rates in the years ahead.

He added; “While a rapid rebound in activity or house prices in 2024 appears unlikely, the outlook is looking a little more positive.”

As far as the Euro-Zone is concerned, Rabobank noted that there was relief following the latest German GDP data as the economy narrowly avoided a technical recession in 2023, but also considers that the economy is currently in recession.

The latest data recorded a decline in retail sales of 1.6% for December after a revised 0.8% decline the previous month and compared with consensus forecasts of 0.7%.

Euro-Zone GDP was unchanged for the fourth quarter of 2023 compared with expectations of a 0.1% decline and a technical recession was avoided.

Confidence in the Euro area generally and Germany in particular will remain in focus.

Rabobank remains concerned over the outlook; “While there is some optimism that Germany may record a modest expansion for the full year in 2024. the structural issues currently faced by Germany are coming into sharper relief.”

Rabobank notes that the ECB will want to talk tough, but expects a soft economy will support market expectations of an early cut.

It adds; “Even if the ECB delays the start of its rate cutting cycle on the back of sticky wage data, economic weakness in Germany will likely feed speculation that the easing cycle could be deeper into 2025.”

HSBC noted the divergence between core and peripheral economies; “The headline was better than expected but hardly grounds for celebration. The stronger peripheral performance is also a hawkish signal for the ECB, which may temper how much help monetary easing can provide to growth.”

Germany will release the latest inflation data on Wednesday with consensus forecasts for a decline in the headline rate to 3.0% from 3.7%.

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TAGS: Pound Euro Forecasts