Pound to Euro Exchange Rate Under 1.17 on Hints of Euro-Zone Recovery

February 27, 2024 - Written by John Cameron

STORY LINK Pound to Euro Exchange Rate Under 1.17 on Hints of Euro-Zone Recovery

The Pound to Euro exchange rate (GBP/EUR) has continued to consolidate below the 1.1700 level and traded close to 1.1685 in early Europe on Tuesday.

The Pound has been underpinned by low volatility in global markets, but overall ranges have remained narrow.

The Euro has also been protected by hopes for a revival in the Euro-Zone economy and doubts whether the ECB will sanction a near-term rate cut.

The British Retail Consortium (BRC) reported that shop prices increased 2.5% in the year to February.

This was a decline from 2.9% previously and the lowest reading since March 2022.

Food prices declined 0.1% on the month with the annual increase slowing to 5.0% from 6.1%

According to BRC Chief Executive Helen Dickinson; "Easing supply chain pressures have begun to feed through to food prices, but significant uncertainties remain as geopolitical tensions rise."

Mike Watkins, head of retailer and business insight at data provider Nielsen IQ, expects that the underlying trend in prices will be downwards over the next few months.

He added; “Since the start of the year, food retailers in particular have reduced prices.”

The data will underpin hopes for lower Bank of England interest rates later this year.

Fiscal policy will also be important with markets will be looking ahead to the March 6th budget.

Within the media the focus will be on tax cuts and there will inevitably be echoes of the 2022 mini budget and a key element will be whether market concerns also increase.

According to ING; “Domestic factors remain very much secondary, although expectations on the 6 March UK Budget may slowly start to feed into GBP price action.”

At the time of the Autumn Statement, there were estimates that the Chancellor would have around £13bn in fiscal headroom this March.

Most investment banks consider that the room for manoeuvre has increased since then.

According to ING, market pricing suggests that headroom has increased to around £18bn.

In this context, tax cuts of this magnitude should not unsettle markets.

ING did note that the room for manoeuvre was limited; “Were Chancellor Hunt to misread the mood of gilt investors and cause another upset, sterling would again come under pressure. Short-term models suggest a 2% sell-off in sterling could happen quite easily were investors to again demand a risk premium of sterling asset markets.”

Euro-Zone developments will also be a key element for GBP/EUR.

The latest German consumer confidence data recorded a slight improvement to -29.0 for February from -29.6 the previous month.

According to ECB President Lagarde, there is reason for some optimism over the Euro-Zone growth outlook with increasing signs of a bottoming-out in growth.

As far as inflation is concerned, the current disinflationary pressure is expected to continue, but she reiterated that the governing council needs to be confident that it will lead sustainably to the 2% target.

She also warned that wage pressures remain strong.

Persistent warnings over wages growth will limit the scope for ECB interest rate cuts.

MUFG noted some hopes for a revival in the global economy which would tend to underpin the Euro. It noted; “The release of the latest PMI surveys last week from Europe continued to cautiously indicate that activity is picking up at the start of this year in the service sector. Fresh policy stimulus measures are helping to improve sentiment towards China’s economy and equity market as well.”

HSBC considers that any dovish surprise on the inflation front could hit the EUR.

In this context, it noted; “The pinch point for the FX market is therefore whether instead the ECB could cut at the April meeting, currently priced as a 1-in-3 possibility.”

It adds; “Our economists have a below-consensus forecast for France, an in-line forecast for Germany, and an above-consensus forecast for the Eurozone. All needs are met, but the common pattern is that inflation likely decelerated across the board.”

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TAGS: Pound Euro Forecasts