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Pound to Euro: Sterling Consolidates Above 1.1700

February 9, 2024 - Written by John Cameron


Foreign exchange update: The Pound to Euro (GBP/EUR) exchange rate has been held in tight ranges during the past 24 hours with mixed influences on the pair.

GBP/EUR held above 1.1700, but unable to challenge resistance level and settled around 1.1715.

Although GBP/EUR should hold firm, resistance will be tough to break down.

The combination of firm UK data releases and solid risk conditions will tend to underpin the Pound, but central bank interest-rate expectations could work the other way.

There is a risk that Bank of England (BoE) expectations will dip while markets are liable to scale back expectations of an April ECB rate cut.

The UK RICS housing index improved further for January with the headline index improving to -18% from -29% the previous month and compared with consensus forecasts of -24%.

New buyer enquiries were at their strongest in almost two years and all major metrics recorded significant improvement for the month.

Tarrant Parsons, RICS senior economist, said: “The UK housing market has seen a continued improvement in buyer activity through the early part of the year, supported by the recent easing in mortgage interest rates. Although sales volumes through much of the year ahead are likely to remain relatively subdued, the outlook has now turned modestly brighter on a consistent basis over the past few survey reports.”

He still voiced a significant element of caution; “However, this is not to say that mortgage affordability isn’t still a significant challenge, and any further unwelcome surprises with regards to inflation may still cause interest rate expectations to be revised. That would then pose a significant risk to any prospective recovery in the months ahead, even if the current prognosis is to see a further pick-up in activity levels.”

Inflation and labour-market trends will also be a key element for the economy and Bank of England policy.

The headline KPMG/REC employment survey retreated to 55.8 for January from 56.5 previously and the lowest reading since March 2021.

According to the REC; "Pay has normalised, inflation is dropping and the hiring market has been cooling for a year now"

In this context, it called for the BoE to start cutting interest rates and commentary from central bank members will continue to be watched closely.

MPC members Mann and Dhingra were due to make comments on Thursday.

The outlook for Euro interest rates also be a key element.

On Wednesday, ECB council member commented; "Selling-price expectations in services, they have gone up for several months in a row. We see sticky services inflation. We see a resilient labour market. At the same time we see a notable loosening of financial conditions."

She added; "I would argue that we are now entering a critical phase where the calibration and transmission of monetary policy become especially important because it is all about containing the second-round effects."

According to Lloyds Bank; “Her comments suggest that, while an April rate cut is possible, a more likely outcome in the spirit of compromise might be June.”

Deutsche Bank considers that strength in equities will be an important consideration for the ECB.

The bank comments; “it's very rare for the ECB to cut rates when equities have not been declining for several months. Given that the DAX hit fresh all-time highs yesterday, that's an interesting context in a year where the market expects the ECB to cut 128bps in 2024, likely starting in Q2.”

ING added; “the market is resolutely attaching a 60% probability to a 25bp cut from the ECB in April. We think this should still be priced out.”

This would tend to underpin the Euro.

MUFG noted mixed data evidence; “The release yesterday of the latest German industrial production data for December provided further evidence that the euro-zone economy was weak at the end of last year although data releases have started to beat expectations on the whole at the start of this year.”
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