Pound Sterling's 2024 Momentum vs Euro, Dollar Stalls on UK Data

January 9, 2024 - Written by David Woodsmith

STORY LINK Pound Sterling's 2024 Momentum vs Euro, Dollar Stalls on UK Data

The Pound has gained ground in 2024 on the basis of stronger-than-expected UK data and an easing of immediate recession fears.

The data has also bolstered expectations that the Bank of England will resist any moves to cut interest rates.

The Pound to Euro (GBP/EUR) exchange rate hit 3-week highs just above 1.1645 late on Monday

The latest UK data has not provided any fresh source of Pound support, but GBP/USD has managed to hold just above 1.1630 with the Euro to Pound (EUR/GBP) exchange rate trading just below the 0.8600 level.

The 1.1630 area is an important technical area with overall sentiment holding firm and a potential base for further gains if the Pound can hold this level.

Wall Street posted significant gains on Monday and overall risk appetite has held firm.

ING commented; “With cross-market volatility remaining fairly subdued it is clear that carry trade strategies will have some enduring appeal.”

Although the direct Pound impact is likely to be limited, interest in carry trades will provide net UK currency support.

As far as the UK is concerned, markets will be waiting for Wednesday’s Treasury Select Committee testimony by Bank of England Governor Bailey.

The latest monthly GDP data will also be released on Friday.

The British Retail Consortium (BRC) reported that like-for-like UK sales increased 1.9% in the year to December from 2.6% previously and below consensus forecasts of 2.3%.

BRC Chief Executive Helen Dickinson commented; “The festive period failed to make amends for a challenging year of sluggish retail sales growth, as weak consumer confidence continued to hold back spending. The post-Christmas sales were unsuccessful in enticing spend in areas such as furniture and homeware, with households remaining cautious about making larger purchases.”

She added; “2024 looks to be another challenging year for retailers and their customers, and spending will continue to be constrained by high living costs.”

According to Paul Martin, UK Head of Retail, KPMG; “Despite falls in inflation, an upcoming cut in national insurance rates, and some consumers having more money in their pockets this Christmas than last, the constant drip of economic challenges they’ve faced over the last two years has finally come home to roost.”

Simon Harvey, head of FX analysis at Monex Europe commented; "As you see economies in the euro zone move to something synonymous with an economic hard landing, you're seeing the opposite in the UK where the data is painting a more optimistic picture, and we think that's got room to run."

He added; "That growth outperformance and the idea that the Bank of England will keep higher rates relatively longer than other central banks, in the short term is very positive for sterling."

Current market pricing shows reflects a 75% chance of a 25 basis-point BoE rate cut in May, and a rate cut is fully price in for June.

In contrast markets have fully priced a 25 basis-point ECB rate cut by April.

While these expectations are intact, there will tend to be net Pound support.

The latest German data recorded a 0.7% decline in industrial production for November after a 0.3% decline the previous month and compared with consensus forecasts of a 0.2% increase.

On the German economy ING commented; “If anything, December is likely to bring more negative surprises, with the first signs of economic fallout from the government’s fiscal woes, disruptions in the Suez Canal and reportedly weak Christmas sales.”

It added; “All of this points to another small contraction in the fourth quarter, pushing the German economy into the first – admittedly very minor – technical recession since 2020.”

From a wider perspective, however, ING considered that there was some more positive evidence with Euro-Zone confidence data improving for December. It noted; “there does seem to be a path to a slightly less pessimistic view of the eurozone economy.”

Any wider Euro-Zone improvement would help cushion the Euro.

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TAGS: Pound Euro Forecasts