Pound to Euro Exchange Rate Close to One-Week Lows as UK/Euro-Zone Performance Gap Narrows

April 5, 2024 - Written by John Cameron

STORY LINK Pound to Euro Exchange Rate Close to One-Week Lows as UK/Euro-Zone Performance Gap Narrows

The Pound to Euro (GBP/EUR) exchange rate dipped to 1-week lows near 1.1650 on Wednesday before a tentative recovery and was held below 1.1660 on Thursday.

The latest business confidence data suggests that the gap between the UK and Euro-Zone economies has narrowed with a tentative recovery in the Euro-Zone while UK growth appears to have slowed slightly.

This convergence will maintain the risk of limited Pound losses with markets monitoring interest rate expectations closely.

The Pound will be vulnerable if expectations of a June Bank of England (BoE) rate cut intensify.

The BoE will be watching wages date closely. According to the latest Decision Makers Survey, companies expect wages growth to slow to 4.9% in the year ahead from the reported increase of 6.4% in the year to March.

Euro-Zone inflation data recorded a decline in the headline rate to 2.4% from 2.6% and slightly below consensus forecasts of 2.5%.

The core rate retreated to 2.9% from 3.1% and marginally below expectations of 3.0%.

The services-sector index held at 4.0% for the fifth successive month.

ING commented on lower inflation; “While at first sight this looks like it opens up a possible rate cut in April, the ECB is unlikely to act this month. More data on wage growth will come in May, and the ECB needs to be certain of its path. In President Lagarde’s own words: “we will know a little more in April, but we will know a lot more in June”.

HSBC added; “while the swifter than expected deceleration is heartening for doves, it is likely the hawks will also want reassurance that wages growth is slowing sufficiently to bring inflation back sustainably to target.”

The final reading for March’s Euro-Zone PMI services-sector was revised to a 9-month high of 51.5 from the flash reading of 51.1 and 50.2 the previous month.

The German services sector also crept into positive territory.

According to the survey, there was a broad-based easing of inflationary pressures as rates of increase in operating costs and selling charges declined.

Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, commented; “Finally some good news again. The service sector in the eurozone is gradually finding its footing, with activity stabilizing in February and showing signs of moderate growth in March.

He welcomed evidence of an easing of price pressures, but added; “Nonetheless, it's premature to discern a clear trend from this data, and as such, we are maintaining our forecast that interest rates will not be cut in April but rather in June.”

Capital Economics senior Europe economist Franziska Palmas commented; “Both we and investors forecast that the ECB will start cutting rates at its meeting on 6 June. However, officials, including ECB President Christine Lagarde, have highlighted that further evidence of easing wage growth will be needed for rate cuts to start.”

As far as the UK is concerned, the PMI services-sector index was revised to 53.1 from the flash reading of 53.4 and weaker than the 53.8 recorded for February and the slowest rate of expansion since November 2023.

Tim Moore, Economics Director at S&P Global Market Intelligence, which compiles the survey: "The recovery in service sector output lost a little bit of momentum during March, and more so than suggested by the flash PMI results, but the overall picture remains reasonably positive.

Although there was further upward pressure on costs, competitive pressures were in evidence and the rate of increase in charges was the slowest since September 2023.

Moore added; “However, it remains well above the long-run trend, therefore adding to signs of sticky inflationary pressures in the domestic economy so far this year."

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TAGS: Pound Euro Forecasts