Pound to Euro Exchange Rate: Close to Three-Week Low

October 18, 2023 - Written by John Cameron

STORY LINK Pound to Euro Exchange Rate: Close to Three-Week Low

Pound to Euro (GBP/EUR) Exchange Rate Closes in on Three-Week Lows

The Pound to Dollar (GBP/USD) exchange rate found support near 1.2130 on Tuesday and rallied to above 1.2200 as the dollar retreated.

Reaction to the slightly higher-than-expected UK inflation data was muted with an initial blip higher reversing quickly and GBP/USD settled close to 1.2200.

The Pound to Euro (GBP/EUR) exchange rate failed to hold gains and retreated to near 3-week lows at 1.1510 before rallying to 1.1530.

There was little net change in Bank of England expectations with markets pricing in around a 75% chance that rates will be left on hold in November, although underlying uncertainty continued.

Expectations of a robust US economy and hopes for a tentative Euro-Zone recovery limited scope for Sterling buying.

UK consumer prices increased 0.5% for September with the headline inflation rate unchanged at 6.7% and slightly above consensus forecasts of 6.6%.

The core inflation rate edged lower to 6.1% from 6.2%, but slightly above expectations of 6.0%.

The goods inflation rate fell slightly from 6.3% to 6.2%, while the services rate edged higher to 6.9% from 6.8%.

According to the ONS, the largest downward contributions came from food and non-alcoholic drinks with the first monthly decline since September 2021.

Food and drinks prices have still gone up by 12.1% in the year to September.

There was, however, upward pressure from the increase in fuel prices.

ONS's chief economist Grant Fitzner commented; "In terms of what is coming up, people will be watching petrol and diesel prices in the coming months quite closely."

He added; “And, of course, next month we also see the new energy price cap kick in for October which fell by around 7%. So, some negative, some positive factors."

Although the September data was slightly higher than expected, there will still be a sharp decline for October, primarily due to the impact of the decline in retail energy prices.

According to Capital Economics chief UK economist Paul Dales; “The pre-announced decline in the Ofgem price cap, which kicked in on 1st October, will subtract a huge 1.3ppts from CPI inflation.”

He added; “That means CPI inflation will be pretty close to 5.0% in October and on track to fall below the 5.1% rate that would mean the Chancellor can successfully say inflation has halved this year.”

According to ING; “We still think services inflation should start to come lower through the remainder of the year, perhaps ending 2023 at 6%. That’s not a huge improvement admittedly, but would echo survey evidence which suggests fewer firms are raising prices and those that are have been lifting them less aggressively.”

The Bank of England will inevitably be watching the data closely.

RSM UK’s economist Thomas Pugh commented; “Overall, today’s data largely vindicates the MPC’s decision to hold interest rates at 5.25%. If inflation registers a big fall in October, as we expect, the case for further tightening will become even weaker.”

ING added; “UK inflation has come in a little higher than expected, but given the surprise isn't huge and some of it can be put down to volatile package holidays, we don't think there's enough here to tempt the Bank of England into resuming its rate hike cycle in early November.”

Charles Stanley Direct, chief investment analyst Rob Morgan also expects rates to be left on hold in November, but considers that the position is far from comfortable.

He added; “Today’s data highlights the stubbornness of UK inflation, especially energy costs and services which will keep the Bank of England on its toes about the possibility of further interest rate hikes.”

Victoria Scholar, head of investment at interactive investor pointed to risks from higher oil prices. She added; “Further increases in oil prices could derail inflation’s path back down towards more normal levels and could also potentially pave the way for further monetary tightening from the central bank.”

Marcus Brookes, chief investment officer at Quilter Investors expects rates will have to increase again.

According to Brookes; “Clearly the UK is not winning any races with this trajectory as inflation still remains incredibly elevated and much more so than peers. It paused on raising interest rates at its last meeting, but this reading means we are likely to see at least another rate rise.”

Globally, the dollar failed to make headway on Tuesday despite the jump in US yields and firm data which tiggered some speculation over underlying flows out of the US currency.

The latest Chinese GDP and retail sales data was slightly stronger than expected which offered some relief surrounding the outlook.

According to ING; “We could see some China-related optimism spilling over equity performance today and keep some pressure on the dollar, even though the big jump in US short-term yields suggests the downside room for the dollar probably remains limited for now.”

MUFG added; Small changes in the global macro backdrop can play an important role in shifting momentum, especially in circumstances like now when the dollar is so over-valued.”

Comments from Federal Reserve officials will continue to be monitored closely.

Credit Agricole sees Pound resilience; “Assuming that UST yields do not rally further or even dip again in response to dovish Fed speak and risk appetite holds up, GBP/USD should remain a buy on dips.

Scotiabank noted GBP/USD resistance at 1.2215/25 with a broadly neutral outlook.

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TAGS: Pound Euro Forecasts