November 15, 2023 - Written by Ben Hughes
STORY LINK Pound to Euro Forecast: 1.15 Ceiling for Sterling say ING Strategists
GBP/EUR Exchange Rate Held Below 1.1500, UK Inflation Slide Reinforces BoE Rate-Cut Expectations
The Pound to Euro (GBP/EUR) exchange rate hit resistance just above 1.1500 on Tuesday and it drifted lower on Wednesday as the larger-than-expected decline in inflation reinforced expectations that the next Bank of England move would be to cut interest rates.
Equities posted a further strong advance and GBP/EUR settled around 1.1475.
UK consumer prices was unchanged in October compared with expectations of a 0.1% increase.
The year-on-year inflation rate declined sharply to 4.6% from 6.7% and slightly below consensus forecasts of 4.7%.
The core inflation rate also declined to 5.7% from 6.1% and slightly below expectations of 5.8%.
Inevitably, the main downward contribution came from housing and household services as the 2022 surge in energy prices came out of the calculation.
The food and drink measure also slowed to a 16-month low of 10.1% from 12.2%.
The inflation rate for goods fell from 6.2% to 2.9%, while the services rate declined from 6.9% to 6.6%.
Office for National Statistics (ONS) chief economist Grant Fitzner commented that inflation is "still quite strong, but heading in the right direction".
He added; "really hard to see any significant upward pressure on prices at the moment".
Samuel Tombs, economist at Pantheon Macroeconomics, expects inflation will ease to around 3.5pc by next March and average about 2.7pc in the second half of 2024.
He added; “We continue to think that sufficient progress back towards the 2pc target will have been made by the MPC’s May meeting for it to reduce bank rate to 5pc, and eventually to 4.5pc by the end of next year.”
Money markets have priced in a quarter of a percentage point cut in interest rates by June next year.
Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales (ICAEW), commented; “This fall in inflation seals the deal on a December interest rate hold and may drive a three-way voting split among rate setters with a member voting for a rate cut as concerns over a flatlining economy grow.”
According to ING; “Today’s figures also all but rule out a resumption of rate hikes in December, though the chances were already low. This was the only CPI release before the next meeting, and we’ll only get one more wage release before then. The next move in rates is therefore likely to be down.”
Paul Dales, chief UK economist at Capital Economics, was more cautious over the outlook; “Looking ahead, our forecast is that the downward trends in CPI and core inflation will stall over the next few months before starting to edge lower again in February.”
He added; “But even then, we think the restrictions on labour supply and the stickiness of inflation expectations will mean that inflation fades slowly rather than suddenly.”
According to Dales; “That explains why we think the Bank of England won’t feel comfortable cutting interest rates until late in 2024 rather than in mid-2024 as priced into financial markets.”
Tom Stevenson, investment director for Personal Investing at Fidelity International also pointed to sticky wage increases; “This week’s employment data showed incomes are now growing faster than prices.”
He added; “This is a positive for the economy but makes it harder for the Bank of England to bring overall inflation back to its 2% target. It suggests interest rates may need to stay higher for longer to finish the job.”
ING sees scope for a further retreat in market rates; “We keep pointing to the fact that pricing in the Sonia curve appears a bit too conservative compared to that of the US and the eurozone in pricing monetary easing and that raises the risk of GBP underperformance as the UK economic outlook deteriorates.”
It added; “The combination of a tentative improvement in eurozone data and soft inflation figures in the UK should help build a floor around 0.8700 in EUR/GBP. (1.1500 ceiling for GBP/EUR).”
According to MUFG; “Beyond the US dollar we remain cautious on the scope for GBP to outperform given the monetary policy impact looks to be weighing down more on the real economy and mild recession looks likely in the coming quarters.”
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TAGS: Pound Euro Forecasts