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Pound Sterling Drifts Lower Against Euro, EU Inflation Crucial This Week

February 26, 2024 - Written by John Cameron


There are no major UK data releases this week with the focus likely to be on central bank talk and Euro-Zone inflation data.

The Pound to Euro (GBP/EUR) exchange rate advanced to 1.1725 on Friday before fading to near 1.1700 and traded just below this level on Monday.

1.1765 remains a key resistance area.

According to ING; “EUR/GBP will be affected by today’s speech from Lagarde and eurozone CPI data on Friday. Here, we expect some stabilisation around the 0.8550 mark.” (1.1700 for GBP/EUR).

MUFG still expects GBP/EUR to make headway; “We are maintaining a short EUR/GBP trade idea even though the pair has struggled to regain downward momentum over the past week.”

The bank has a longer-term target of 1.2080 for GBP/EUR.

MUFG has a positive stance on the UK outlook; “we are more optimistic that the outlook for the UK economy is improving at the start of this year. Leading indicators such as the PMI surveys have been signalling that growth is picking up which creates a more supportive backdrop for the GBP.”

The bank also notes that the recent pick-up in business confidence has been stronger in the UK than in the euro-zone. If this trend is sustained, there will be net Pound support.

Monetary policy developments will continue to be a key element for currency-market sentiment.

There has been a general push back in expectations of early rate cuts for both the ECB and Bank of England.

According to futures markets, confidence in an April ECB rate cut has continued to fade with the focus now on June.

In comments over the weekend, ECB council member Stournaras noted; “The latest deceleration in wages gives hope that we are on track. But we won’t have enough information to decide on rate cuts before the end of the second quarter.”

The latest Euro-Zone inflation data will be released on Friday. Consensus forecasts are for the headline rate to decline to 2.5% from 2.8% with the core rate retreating to 2.9% from 3.3%.

ING commented; “A drop in core inflation below 3.0% may prompt European Central Bank doves to raise their voices, but the consensus within the Governing Council appears directed at waiting for early-2024 wage data before taking steps to ease policy.”

As far as the Bank of England (BoE) is concerned, the chances of a June rate cut have dipped just below 50%.

Overall cost pressures within the economy will continue to be watched closely.

The domestic pressures from higher wages will remain an important element for the BoE.

Global pressures will also have an impact with the Red Sea developments potentially important.

According to the latest British Chambers of Commerce (BCC) survey, over 50% of manufacturers and exporters have been affected by disruption to shipping through the Red Sea

The BCC's head of trade policy, William Bain, commented; "There has been spare capacity in the shipping freight industry to respond to the difficulties, which has bought us some time." But our research suggests that the longer the current situation persists, the more likely it is that the cost pressures will start to build."

MUFG added; “We expect the BoE to begin cutting rates after the ECB and Fed placing upward pressure on the GBP in the near-term. A bigger fiscal giveaway in the government’s budget on 6th March could provide a fresh catalyst for further GBP gains.”

The latest COT data recorded a small decline in long non-commercial Sterling positions to 46,300 contracts from 6-month highs of 50,500 previously.

In contrast, there was an increase in long Euro positions to 68,000 from 16-month lows just below 53,000 the previous week.

The data suggests that the overall momentum for a closing of Euro long positions and build-up in Pound longs has potentially hit a turning point.

If this is the case, the Pound will need positive UK fundamental developments to make fresh headway against the single currency.
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