Pound to Euro Mid-Week Forecast: BoE and ECB Guidance in Focus

December 13, 2023 - Written by Frank Davies

STORY LINK Pound to Euro Mid-Week Forecast: BoE and ECB Guidance in Focus

Weaker-than-expected UK GDP data on Wednesday triggered Pound losses with the Pound to Euro (GBP/EUR) exchange rate sliding to 10-day lows around 1.1610.

The data will not have an impact on Thursday’s Bank of England decision, but there will be a stronger conviction of notable rate cuts in 2024.

Money markets are currently pricing in a rate cut by June.

According to Elizabeth Martins, senior economist at HSBC; "This October print is probably in line with the Bank's soggy forecast, and hence adds to a growing dovish narrative."

She added; "If the BoE's hawks wanted to push back on market expectations of rate cuts starting mid-next year, the data are giving them very little work with."

The ONS reported that UK GDP declined 0.3% for October after 0.2% growth in September and compared with consensus forecasts of a marginal contraction.

The services sector registered 0.2% contraction after 0.2% growth previously.

All sectors were in contraction for the month with industrial production declining 0.8% and a 0.5% retreat for the construction sector.

There was no GDP growth in the three months to October and the year-on-year expansion slowed to 0.3% from 1.3% previously.

The weak data for October will increase the risk of a negative figure for the fourth quarter and there could be a technical recession if there is a downward revision for the third quarter.

ONS Director of Economic Statistics Darren Morgan commented; “Services were the biggest driver of the fall with drops in IT, legal firms and film production - which fell back after a couple of strong months.”

He added; “These were also compounded by widespread falls in manufacturing and construction, which fell partly due to the poor weather.”

According to RSM UK economist Thomas Pugh; “The 0.3% m/m contraction in GDP in October, coming on the back of flatlining growth in Q3, has our recession warning indicators flashing red. However, growth should pick up over the rest of the quarter as a sharp fall in inflation, strong wage growth and government transfers to low-income households all give consumer spending a boost.”

He added; “In any case, the big picture is still one of a stagnating economy. We doubt growth will materially pick up until towards the end of next year, meaning that the spectre of recession will hang over the UK economy for a long time yet.”

Rob Morgan, chief investment analyst at Charles Stanley Direct, added; “Particularly wet weather during the month was cited as a negative factor, but that doesn’t change the bigger picture of an economy flatling with risk to the downside.”

An important element will be the extent to which the data influences Bank of England (BoE) thinking.

Lindsay James, investment strategist at Quilter Investors, sees increased pressure on the BoE; “While no rate cuts are expected tomorrow, or for some time, it will be crucial to see how the BoE is monitoring economic growth going forward and what that might mean for the path of interest rates. Calls for rate cuts are likely to grow stronger should this sort of economic data persist.”

According to Samuel Tombs, chief UK economist at Pantheon Macroeconomics; “October’s drop in GDP adds to the growing list of recent downside data surprises, but we still doubt that the MPC will change its tune and signal its willingness to cut Bank Rate next year as soon as this week’s meeting.”

ING expects the data will have little direct impact; “The October figures mean that we are on track for a marginally negative 4Q GDP print in the UK, although that is not at the top of the Bank of England’s concerns at the moment. We still expect a hawkish tone tomorrow to give some help to sterling, especially in the crosses.”

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TAGS: Pound Euro Forecasts