Pound to Euro Exchange Rate: Recovery from 5-Month Lows

October 23, 2023 - Written by James Fuller

STORY LINK Pound to Euro Exchange Rate: Recovery from 5-Month Lows

Pound Euro Closes in on 1.1500

After posting 5-month lows at 1.1440, the Pound to Euro exchange rate has rebounded to near 1.1500

Geo-political developments and Middle East tensions, together with the relative outlook for major economies, will be key elements during the week.

MUFG commented; “If the geopolitical landscape remains as it is, financial market participants will likely revert to the key events of this week – the ECB policy announcement on Thursday and the flow of economic data from the US that will be key for the moves in the UST bond market.”

After initial weakness on Friday, the Pound was able to demonstrate some resilience and secured a net recovery.

This was notably significant given that risk appetite remained vulnerable with further losses for equities.

After finding support below 1.2100, the Pound to Dollar (GBP/USD) exchange rate recovered to the 1.2170 area.

GBP/USD traded around 1.2175 on Monday with GBP/EUR close to 1.1480.

According to Scotiabank; “A deeper GBP/USD rebound through 1.2190/00 resistance is needed to secure gains towards 1.23 from a technical point of view.”

ING expects a strong US GDP release this week with the potential for annualised growth above 4.0% while it expects a strong reading for the US PCE prices index.

Strong data should underpin the dollar; “In theory, then, this data should offer nothing to dollar bears, and selling dollars rather looks like a leap of faith on the view that this is as good as it gets for the dollar.”

It adds; “Perhaps the most likely scenario for a lower dollar is one where equities fall so hard that the short-end of the US curve is re-priced lower and crowded long dollar positions get scaled back.”

Credit Agricole expects that risk trends will be a key element.

It adds; “The USD might find significant support if global markets witness heightened risk aversion, channelling more investments into safe-haven US assets. Investors should be vigilant of global risk sentiments to gauge future USD movements.”

MUFG notes that official data has remained strong, but it considers that underlying developments are less favourable.

According to the bank; “our text sentiment analysis of the Beige Book, the comments from Harker on Friday and Powell’s more cautious tone on the restrictiveness of the monetary stance make us more confident that the flow of macro data should start to turn more in favour of some correction lower in yields that would mark a turn for the dollar too.”

Nordea notes the risk of further upward pressure on yields; “Central banks are pausing their interest rate hiking cycle but inflation is not back at their 2% target. This puts upward pressure on longer-dated interest rates at a time when US economic activity is about to slow from elevated growth rates.”

ING expects that the Euro-Zone data will be weak which would tend to hamper the Euro, but it does note some positives with Italy’s credit rating maintained at BBB by S&P while there was an upgrade for Greece to investment grade for the first time since 2010.

According to ING; “These moves suggest rating agencies are not yet ready to pull the trigger on the ongoing loose fiscal policy seen in Italy, for example.”

This will provide an element of Euro protection.

As far as the UK is concerned, the latest PMI business confidence data will be released on Tuesday.

Consensus forecasts are for the manufacturing and services sectors to remain in contraction territory.

There was an upgrade for the final services-sector reading for September and any further recovery to above 50.0 would underpin the Pound.

There was also some media speculation that the government would look to cut taxes in response to the by-election humiliation last week.

The Autumn Statement is due to be presented on November 22nd.

According to ING; “weekend commentary could point to some potential surprises here and at the margin could prove a sterling positive were looser fiscal policy available after all.”

ING expects further short-term Euro support below 1.1500.

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TAGS: Pound Euro Forecasts