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Pound Euro Rate Today: Sterling Jumps to 10-week Highs as ECB Rate Cuts Seen as Inevitable

December 3, 2023 - Written by Frank Davies


The overall data flows and central bank interest rate expectations have continued to underpin the Pound against the Euro with Bank of England (BoE) having greater success than the ECB in pushing back against expectations of rate cuts next year.

The Pound to Euro (GBP/EUR) exchange rate was unable to hold above 1.1600 on Thursday, but secured fresh buying on Friday with 10-week highs at 1.1625.

Nationwide reported that UK house prices increased 0.2% for December after a 0.9% increase the previous month and compared with expectations of a 0.4% decline.

The annual decline slowed to 0.2% from 3.3% previously.

Robert Gardner, Nationwide's Chief Economist, commented; “There has been a significant change in market expectations for the future path of Bank Rate in recent months which, if sustained, could provide much needed support for housing market activity.”

He added; “While mortgage rates are unlikely to return to the lows prevailing in the aftermath of the pandemic, modestly lower borrowing costs, together with solid rates of income growth and weak/negative house price growth, should help underpin a modest rise in activity in the quarters ahead.”

He still sees a rapid rebound as unlikely with weak consumer confidence and notably subdued buyer enquiries.

Hawkish BoE rhetoric has been an important theme this week and continued on Thursday, although markets have not heard from the more dovish committee members.

MPC member Greene commented that the natural rate of interest rates may now be higher. She added; "These shifts suggest policy may have to be restrictive for an extended period of time in order return inflation to 2% over the medium-term."

According to Greene; "I think that there is not only a risk of weaker activity than expected, there's also a risk of stronger activity than expected, and that's why I continue to put my focus on inflation persistence.”

In this context, she added; “doing too little was a bigger risk than doing too much, although she did admit that the situation was now more finely balanced.

MUFG considers that; “The BoE are likely to remain much more concerned over domestically generated inflation than in either the US or the euro-zone.”

It added; “The shift in thinking on the ECB given the recent evidence of faster declines in inflation does leave EUR/GBP open to further falls as a divergence in inflation and therefore policy expectations widens further. EUR/GBP has dropped through its 50-day, 100-day and 200-day moving averages in the last five trading days and risks are skewed to the downside for now.” (Further upside for GBP/EUR).

Following the weaker than expected Euro-Zone inflation data, there was a further shift in interest rate expectations with markets pricing in 100 basis points of rate cuts by the end of 2024.

The shift in expectations undermined the Euro against the dollar and Pound.

According to ING; “Short-term rate differentials unequivocally pointed to a weaker EUR/USD before the EZ inflation.”

ING added; “Today, the focus will be on a speech by ECB President Christine Lagarde. She will probably continue to hang on to some hawkish arguments to limit rate cut bets, but the efficacity of this line of communication remains questionable.”

Simon Harvey, head of FX analysis at Monex Europe, said recent weak data suggested that euro area monetary policy is too tight and has induced a recession.

According to Harvey; "The ECB should begin to ease policy as soon as April 2024, with risks that a more sinister downturn in growth could warrant a rate cut as soon as March."

Commerzbank, however, considers that the traditionally slow ECB reaction function could favour the Euro.

It adds; “The ECB's interest rate policy is typically rather slow and cautious. Such a monetary policy style in a phase of general interest rate cuts should have an equally EUR-positive effect if the ECB central bankers follow their G10 colleagues (especially the Fed) with some delay in the coming year.”
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