Pound to Euro Rate Today: "Limited Scope" for GBP/EUR Gains

January 22, 2024 - Written by David Woodsmith

STORY LINK Pound to Euro Rate Today: "Limited Scope" for GBP/EUR Gains

The Pound to Euro (GBP/EUR) exchange rate was unable to hold 1-month highs near 1.1690 last week and retreated to 1.1660 on Monday, although relatively narrow ranges prevailed.

Any further recovery in equities would support both the Pound and Euro.

The timing of potential interest rate cuts by the Bank of England (BoE) and ECB will continue to be a key influence on GBP/EUR with business confidence data very important ahead of Thursday’s ECB policy meeting.

Firm UK data would tend to give GBP/EUR a lift.

There have been several fluctuations in expectations during the past few months.

Markets were expecting that the Bank of England would cut interest rates in May, but pricing has now drifted towards a June cut.

As far as the ECB is concerned, markets have also shifted the pricing in favour of June compared with previous expectations of March/April.

There are important Euro-Zone releases this week.

According to ING; “The euro has plenty to sink its teeth into this week. Tomorrow sees the latest ECB bank lending survey and Wednesday sees the flash PMIs for January. These two data sets had weighed quite heavily on the euro last autumn/winter and will be closely watched ahead of the ECB policy meeting.

These releases will have a further important impact on rate expectations.

ING commented; “Friday's release of soft UK retail sales in December has not done too much damage to the pound. Given that it's PMI week, sterling may continue to hold gains against the euro. This is because the UK's composite PMI is smartly above 50 (last reading 52.2) compared to the eurozone's (48.0).”

Consensus forecasts are for the Euro-Zone data to show a marginal improvement on the month with manufacturing and services still in contraction territory.

The UK services-sector index is forecast to maintain significantly above the 50.0 level for January.

Expectations of favourable UK data will tend to underpin the Pound into the data.

ING still expects GBP/EUR will find strong resistance in the 1.1700 - 1.1765 band.

As far as Thursday’s ECB decision is concerned, there are strong expectations that the ECB will make no changes to interest rates with the refi rate held at 4.50%.

Forward guidance from the bank will be a key element.

According to Danske Bank; “We expect President Lagarde to confirm that the next policy rate change is most likely a cut, which may happen in summer. It remains to be seen whether the June meeting will be singled out as the key meeting to watch.”

Hawkish comments from central bank officials, together with a wider increase in global yields has led to a significant change in pricing.

MUFG notes that the euro-zone rate market has already taken out around 40bps of expected cuts by the end of this year and it expects a hawkish tone at this meeting.

Nevertheless, the bank still sees only limited scope for moves; “ECB policymakers have been very busy at the start of this year outlining their views on monetary policy so there is unlikely to be major policy surprises at this week’s meeting.”

According to Nordea; “The ECB has argued almost in unison that no near-term rate cuts should be expected. We still see the first move in June, 25bp, and quarterly 25bp cuts from there onwards, but risks are towards an earlier start and steeper cuts.”

Latest COT data released by the CFTC, recorded a notable increase in non-commercial long Sterling positions to just below 31,000 contracts from 20,700 the previous week.

This was the largest long position since September 2023 and will tend to limit the scope for further Pound buying unless there is notable favourable data surrounding the UK economy.

In contrast, there was a net decline in long Euro position to 104,000 from 118,900 the previous week.

The net moves in positioning will tend to limit the scope for GBP/EUR gains.

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TAGS: Pound Euro Forecasts