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Pound Sterling: Battle Lines Drawn, Support vs Euro Below 1.17

March 15, 2024 - Written by John Cameron

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The Pound to Euro exchange rate (GBP/EUR) again found support below 1.1700 on Wednesday and moved back above 1.1700 to trade just above this level on Thursday.

Global markets conditions have been favourable for the Pound with low volatility and net gains in equities as the UK FTSE 100 index posted a 7-month high.

According to MUFG; “The ongoing drop in foreign exchange market volatility is reinforcing favourable conditions for FX carry trades.”

Rabobank maintains a positive stance on the pair; “On balance, we retain a modestly constructive picture for GBP vs. the EUR for the year ahead. This is supported by our house expectation that the BoE could retain steady policy until September. This compares with our forecast of rate cuts from both the ECB and the Fed in June. “

It added; “We continue to forecast a move to EUR/GBP 0.84 in the latter half of this year.(GBP/EUR Gains to 1.1905)

In contrast; “SocGen recommends selling GBP/EUR on approach to 1.1765.

The headline UK RICS house price index improved to -10% in February from a revised -19% the previous month. This was in line with consensus forecasts and the strongest reading since October 2022.

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Underlying metrics were mixed, although new instructions to sell increased at the fastest rate since October 2020.

Simon Rubinsohn, RICS chief economist, commented; “The February RICS survey provides some grounds for encouragement around the sales market with not just buyer interest staying positive for the second successive month, but also the uplift in new instructions to agents."

He still expressed some reservations over near-term prospects and added; “the near-term outlook is still somewhat cautious reflecting, in part, the suspicion that the recent easing in mortgage rates is likely to stall on the back of ongoing uncertainty about the timing and speed of interest rate reductions.”

Markets are still backing a first interest rate cut at the August policy meeting, although MUFG noted that the chances of a June rate cut is now close to 50%.

Initial data indicated that the UK registered a vey shallow technical recession in the second half of 2023.

According to MUFG; “We would not be surprised to see it revised away over time given that the GDP contraction is not backed up by weakness in the labour market. The BoE’s upcoming policy meeting next week will provide more insight over the potential timing of the first rate cut.”

Rabobank commented; “On balance, January UK data have already provided some evidence that the economic outlook has started to improve. This is in line with comments from BoE Governor Bailey in the middle of last month suggesting that the economy is showing “some signs of upturn.”

It added; “We expect that the interest rate differential, signs of an improving UK economic outlook combined with the prospect of a dull UK election and a relatively stable political backdrop should provide moderate support for the Pound.”

SocGen is concerned that hopes for a UK rebound is already priced in. It noted; “According to the CFTC, sterling positioning has been rising quickly since the end of last year. It now exceeds 60k contracts and is near the high of 2023, which at the time triggered a market unwind, pushing down GBP.

On the other side of the equation, Stuart Bennett head of G-10 FX Strategy at Santander CIB considers that a recession is priced in; "Admittedly, the recession is expected to be shallow and institutions have been warning for a while that the UK economy would likely be weak, which may therefore already be priced in."

HSBC sees scope for a more dovish Bank of England stance; “there may be room for some dovish developments at the 21 March meeting. An example of this would be if one of the prior two votes for a hike switched to an unchanged vote, for example.”

It recommends selling GBP/EUR just above the 1.17 level.


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