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Pound Sterling and Euro Both Struggle - Foreign Exchange News

February 5, 2024 - Written by John Cameron


Foreign exchange update: The Pound to Euro exchange rate (GBPEUR) found support below the 1.1700 level in Asia on Monday and strengthened to near 1.1720 after the European open.

Markets overall are more confident over the UK economic outlook and Euro-Zone investor confidence improved in February, but the Pound and Euro have both lost ground in global markets on Monday.

Bank of England (BoE) and ECB expectations will be a key element for currency markets.

Last week, the Bank of England pushed back against the possibility of a near-term interest rate cut with comments that it was too early to be confident that inflation would decline to the 2% target on a sustainable basis.

A key element for the Pound is whether the BoE rhetoric is seen as credible.

The UK data releases will, therefore, continue to be watched closely.

The final UK services-sector PMI reading was revised higher to a fresh 8-month high of 54.3 for January from the flash reading of 53.8 with confidence at a 9-month high.

Average prices charged by service sector firms continued to increase at a strong rate for January, but the rate of increase was at a 4-month low.

Tim Moore, Economics Director at S&P Global Market Intelligence, which compiles the survey commented; "A combination of falling inflation and improving order books provided a strong boost to business activity expectations across the service economy. Another uplift in business confidence in January provides a signal that elevated levels of geopolitical uncertainty have yet to exert much of a constraint on service sector growth projections for 2024."

The UK economic calendar is relatively light this week, although the RICS housing data could be significant, while comments from Bank of England members will continue to be watched closely.

According to MUFG; “We still believe the BoE, like other central banks has probably over-tightened and the initial reluctance to signal notable easing will likely give way and assuming the Fed and ECB cut in April-May-June time, we see the BoE cutting either in May or June.”

COT data, released by the CFTC recorded a further increase in long, non-commercial Sterling positions to 34,200 in the latest week from 31,400 previously and the largest long position since September 2023.

Rabobank noted; “GBP net long positions have increased for the fifth consecutive week, driven by a rise in long positions.”

Given the increase in Sterling longs, the Pound will need the positive run of data releases to be sustained to trigger further buying.

BNP Paribas is still wary over the Pound outlook; The BoE outcome reinforces our caution in building long positions in GBP. The possibility of an earlier start to BoE rate cuts poses a downside risk to the pound."

The Euro-Zone Sentix investor confidence index improved to -12.9 for February from -15.8 previously and above consensus forecasts of -15.0.

According to Sentix; “The Sentix Economic Sentiment Index for the eurozone rises for the fourth time in a row to -12.9 points. Nevertheless, the recovery process is proceeding slowly and the all-clear still cannot be given.” Primarily this reflects concerns over Germany.

The final reading for the Euro-Zone PMI services-sector index was in line with the flash reading of 48.4.

Rates of input cost and output price inflation accelerated to eight-month highs due to more pronounced price increases across the service sector.

Cyrus de la Rubia, chief economist at Hamburg Commercial Bank commented; "The European Central Bank's hesitancy to cut interest rates gains clarity when considering the surge in the PMI price indices."

He added; "With both input and output prices in the services sector on the rise, the ECB is reluctant to ease monetary policy."

ING expects the Euro will be on the defensive; “Given the market still prices a 55% chance of an ECB rate cut in April, there is always a risk of a EUR-positive back-up in short-term rates if that cut is removed. It is not clear this will be the week in which the April rate cut is removed.”
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