Pound Euro Rate Today: Sterling Rallies to 1.1500

October 26, 2023 - Written by James Fuller

STORY LINK Pound Euro Rate Today: Sterling Rallies to 1.1500

GBP/EUR Exchange Rate Pushes Through 1.1500 as Markets Debate UK and Euro-Zone Recession Threats

The Euro and Pound both remain under threat due to a lack of confidence in the Euro-Zone and UK economies respectively.

The Pound to Euro (GBP/EUR) exchange rate dipped to lows at 1.1450 on Thursday before rallying to near 1.1500 after the Wall Street open. Both currencies have found it difficult to gain a sustained advantage.

Danske Bank expects GBP/EUR will weaken to 1.1235 on a 12-month view.

Markets are increasingly convinced that the Bank of England will decide against further interest rate hikes.

Despite stubborn inflation, the narrative of higher for longer will also be in jeopardy if recession risks intensify.

Danske Bank analyst Kirstine Kundby-Nielsen commented; "I would attribute the latest weakening to dovish commentary from the BoE, UK data broadly coming in softer than expected and markets increasingly pricing out the risk of another hike and thus the conclusion of the hiking cycle."

The latest CBI retail sales survey declined to –36 in October from –14 in September. This was well below consensus forecasts of -16 and the second-weakest reading since March 2021. It was also the sixth successive reading in contraction territory.

Retailers expect a further decline in November, although the rate of decline is expected to moderate.

Retailers continue to consider that stocks are too high.

CBI Principal Economist Martin Sartorius commented; “As the festive period approaches, the retail sector remains in a perilous position. Sales volumes have been falling year-on-year for six months in a row, as cost-of-living concerns and higher interest rates weigh on consumer spending. Retailers expect the downturn in sales to continue next month, albeit at a slower pace.”

He added; “While slowing inflation should help to bolster households’ income in the coming months, retailers will continue to face headwinds from higher energy and borrowing costs.”

According to Jane Foley, head of FX strategy at Rabobank "The weakness of the CBI survey has highlighted the headwinds facing the consumer in the UK.”

Although UK economic concerns have increased, the relative outlook against the Euro is more complicated.

Rabobank added; "Looking forward both the UK and the euro zone face the potential of technical recession suggesting that downside potential for the pound versus the euro could be limited".

The ECB held the main refi interest rate at 4.50% following the latest council meeting which was in line with consensus forecasts.

The central bank stated that inflation is still expected to stay too high for too long and domestic price pressures remain strong.

Policy was, however, working as planned through monetary transmission with weaker demand helping to curb inflation pressures.

According to the statement, governing council decisions will ensure that policy rates will be set at sufficiently restrictive levels for as long as necessary.

Bank President Lagarde refused to say that rates have peaked, but the market is confident that this is the case.

According to ING; “In our base case scenario, the ECB is done with hiking rates as the eurozone economy is simply weaker than the central bank has always thought.”

The bank notes the potential inflation risks if there is a further increase in oil prices.

ING adds; “The stagflation risk is real. While in a stagflation scenario, the pre-pandemic ECB would have always opted to support growth, the current ECB is likely to tackle inflation, rather than stagnation.”

This policy will undermine the Euro if recession risks intensify.

In contrast; “Ulrike Kastens, European economist at DWS stated; "We still expect a first rate cut at the end of the second quarter."

She added; "Inflation rates will continue to fall due to base effects and underlying factors. And the ECB will also come under pressure from the economic side, with sentiment indicators, credit standards and a decline in lending pointing to a significant weakening in domestic demand.”

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TAGS: Pound Euro Forecasts