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Euro to Pound Outlook: The Down Trend has "Tentatively Stalled" says SocGen

February 7, 2024 - Written by John Cameron


GBP/EUR Exchange Rate Rebounds from 2-Week Lows on Positive UK News Flow

The Pound to Euro (GBP/EUR) exchange rate dipped to 2-week lows just below 1.1670 on Tuesday before a solid recovery to just above the 1.1700 level.

The overall UK data flows has remained broadly positive which has helped underpin the Pound.

Sentiment in global equities remains firmer, especially amid hopes for Chinese support measures, which has helped support the UK currency.

In this context, GBP/EUR rebounded further to 1.1730 in Europe on Wednesday and will be looking to challenge 5-month highs near 1.1750.

Halifax reported that UK house prices increased 1.3% for January after a 1.1% increase the previous month and compared with consensus forecasts of a 0.8% monthly increase and the fourth monthly increase in a row.

Prices increased 2.3% over the year, the strongest increase since January 2023.

Kim Kinnaird, Director, Halifax Mortgages, commented; “The recent reduction of mortgage rates from lenders as competition picks up, alongside fading inflationary pressures and a still-resilient labour market has contributed to increased confidence among buyers and sellers. This has resulted in a positive start to 2024’s housing market.”

She was still relatively cautious over the outlook; “Looking ahead, affordability challenges are likely to remain and further modest falls should not be ruled out, against a backdrop of broader uncertainty in the economic environment.”

The UK construction PMI index improved to 48.8 for January from 46.2 the previous month and above consensus forecasts of 47.2.

According to Tim Moore, Economics Director at S&P Global Market Intelligence, which compiles the survey; "UK construction companies seem increasingly optimistic that the worst could be behind them soon as recession risks fade and interest rate cuts appear close on the horizon.”

RBC Capital Markets still expects that the BoE will be cautious in lowering interest rates; “Following the shift in the MPC’s rhetoric, our economists now expect the BoE to start cutting rates in August and lower the policy rate by a total of 100bps to 4.25% by the of 2024. Although the magnitude is similar to markets pricing -97bps by year-end, this would still mean the BoE will start cutting rates later than the Fed and the ECB.”

The bank expects a later BoE rate cut would help underpin the Pound.

ING still expects that the Pound will lose ground this year as the Bank of England cuts interest rates.

It noted; “We do have a bullish profile for EUR/GBP this year – largely on the view that the BoE cuts more aggressively than the ECB. Let's get the sterling positive event risk of the budget out of the way in early March and then the market should be able to focus on the sharp drop in UK headline inflation through the second quarter, as well as a softer pound.”

Germany reported that industrial production declined 1.6% for December compared with expectations of a 0.4% decline while the November decline was revised to show a 0.2% decline compared with the 0.7% contraction reported previously.

According to ING; “The sharp drop in both exports and imports, as well as today’s industrial production, not only illustrates the weakness of the German economy’s backbone but also increases the risk of a downward revision of fourth-quarter GDP growth.”

It did, however, add; “the recent increase in industrial orders brought at least some vague light at the end of what increasingly looks like a very long tunnel.”

According to RBC Capital Markets; “We have long been EUR bears, but we also can’t help feeling the EUR bearishness is pretty well priced by now.”

SocGen looks at the technical outlook and notes; “Daily MACD has started posting positive divergence denoting receding downward momentum. The down move has tentatively stalled; retest of 200-DMA near 0.8625 can’t be ruled out. (1.1595 for GBP/EUR). This must be overcome to confirm an extended bounce.

In case the pair fails to defend 0.8490, the phase of correction could extend towards projections of 0.8455 and 0.8385. (1.1825-1.1925 for GBP/EUR).
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