November 30, 2023 - Written by Frank Davies
STORY LINK Pound to Euro December Forecast: Potential Scope to 1.1630
The Pound to Euro exchange rate strengthened to 7-week highs just above 1.1600 in early Europe on Thursday before a retreat to 1.1580 in choppy trading.
Interest-rate expectations will remain a key driver for GBP/EUR in the short term and the Pound should maintain an underlying firm tone in the short term.
The latest data has reinforced expectations that the ECB will be in a position to cut interest rates next year, but there was an element of buying the rumour and selling the fact with the Euro recovering some ground after the data.
The combination of hawkish Bank of England (BoE) rhetoric and further evidence of sticky inflation has triggered fresh doubts whether the BoE will cut interest rates before the middle of 2024.
Risk conditions have been relatively benign amid hopes for a soft US landing which has limited any potential selling pressure on the Pound.
November inflation data for Spain and Germany released on Wednesday was significantly weaker than expected.
The French data released on Thursday also recorded a decline in the annual rate to 3.4% from 4.0%.
As far as the Euro-Zone is concerned, the headline inflation rate declined sharply to 2.4% from 3.2% previously. This was below consensus forecasts of 2.7% and the lowest reading for over two years.
The core rate also declined to 3.6% from 4.2% which was below expectations of 3.9% and the lowest reading since May 2022.
Mohamad Al-Saraf, associate, FX and rates strategy at Danske Bank commented; "Yesterday we saw weaker data from Germany and Spain and this morning France and it looks like the aggregate figure we get from the euro zone will most likely be lower than expected."
He added; "If that happens, we could see more rate cuts priced for the European Central Bank and initially it will probably be bearish for the euro."
According to ING; “The implications for the euro would probably be material only if the figures come in surprisingly higher than expected. That’s because markets are already pricing in 75bp of easing by the European Central Bank in 2024, with no chance of any more hikes. Above all, the focus appears to be much more on the deteriorating growth outlook than on a well-telegraphed inflation slowdown.”
It added; “That said, lower inflation is hardly ever good for a currency and may keep the euro's upside room capped today.”
According to MUFG; “The easing of the negative energy price shock in Europe triggered by the Ukraine conflict has helped to support the euro this year.”
MUFG still sees underlying Euro vulnerability; “The macro developments are increasing the likelihood that the ECB could begin to cut rates ahead of the Fed next year posing downside risks for the euro in early 2024.”
As far as UK data is concerned, the Lloyds Bank business barometer index strengthened to 42 for November from 39 the previous month and the highest reading since February 2022.
Hann-Ju Ho, senior economist at Lloyds Bank Commercial Banking, commented; “Business confidence rising to a 21-month high shows the resilience of UK companies, as both trading prospects and economic optimism continue to rise.”
She added; “It’s encouraging to see signs that wage expectations may be stabilising, even against the backdrop of hiring intentions increasing to an 18-month high. Price indicators in the survey are similarly up, with our data continuing to show that firms are still safeguarding their profit margins in response to past rises in interest rates, wage increase pressures, and the prospect of higher energy prices again this winter.
According to the survey, a record share of companies are planning price increases.
As far as growth is concerned, the improvement in business confidence will help offset the pessimistic tone from BoE Governor Bailey.
The BoE will, however, be concerned over pricing pressures, especially given evidence of business intention to increase prices.
Given price action, ING sees potential scope for GBP/EUR gains to 1.1630.
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TAGS: Pound Euro Forecasts