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Pound to Euro Rate Tests Three-Week Best as Global Euphoria Lifts Sterling

March 8, 2024 - Written by David Woodsmith


Benign global risk conditions and expectations of an ECB rate cut ahead of the Bank of England (BoE) have underpinned the Pound in global markets with the Pound to Euro (GBP/EUR) exchange rate strengthening to 3-week highs just below 1.1740.

There is likely to be further strong resistance on any GBP/EUR move to 1.1765 and a slide in risk appetite would also hurt the Pound.

The dollar has weakened in global currency markets while US equity markets have posted further gains with the S&P 500 index posting a fresh record high.

This combination of near euphoria has boosted risk-sensitive currencies in global markets with the Australian and New Zealand dollars making gains.

The Euro to Australian dollar (EUR/AUD) exchange rate, for example, has retreated to 5-week lows.

The Pound has also benefitted from benign risk conditions, although it has under-performed relative to the Australian currency.

GBP/AUD, for example dipped to 10-day lows around 1.9280 before edging back above 1.9300.

There have been no significant UK data releases over the past 24 hours and the UK budget failed to have a significant impact on market expectations surrounding interest rates.

The market focus will now tend to return to economic data releases to drive interest rate expectations.

In the week ahead, the UK will release the latest labour-market data and GDP data.

Within the labour-market data, the main focus will be on wages, especially as survey data has suggested only a very limited slowdown in wages growth.

UK data releases over the next two weeks will be a key element in determining whether there is a shift in expectations surrounding the first BoE rate cut.

A robust batch of releases would reinforce market speculation that the BoE will cut rates after the ECB.

Weaker than expected data would, however, trigger fresh speculation over an earlier cut in BoE interest rates.

The ECB made no changes to monetary policy at the latest policy meeting with the main refi rate held at 4.5% which was in line with expectations.

According to the statement; “The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner.”

It added; “Based on its current assessment, the Governing Council considers that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal. The Governing Council’s future decisions will ensure that policy rates will be set at sufficiently restrictive levels for as long as necessary.”

Markets looked at the revised inflation forecasts closely.

The 2024 core inflation rate was revised down to 2.6% from 2.7% with the 2025 forecast lowered to 2.1% from 2.3%.

The 2026 rate is now forecast to meet the target at 2.0%.

According to Rabobank; “Crucially, the central bank’s staff projections for both growth and inflation were revised down, with the ECB’s economists now seeing core inflation at target in 2026, and close to in 2025. This added a dovish element to the meeting, even as president Lagarde was slightly more reserved during the press conference.”

Rabobank now expects an earlier cut and added; “Nonetheless, her phrase, “we will know a little more in April, but a lot more in June,” was a signal even the famously direct Dutch could pick up on, pointing to a probable rate cut in June. This has now become our base case scenario. We expect further cuts in September and December.”

ING is backing a June cut; “As long as the ECB is not willing to accept that inflation is only roughly returning to target but instead pushing for an exact landing point of 2%, rate cuts should be on the agenda only at the June meeting. This is when enough data points will be available, either confirming that the inflation beast has really been tamed or pointing to renewed upward pressure on prices.”
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