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Pound to Euro Rate Outlook: Lagarde to "pre-announce" June rate cut

April 11, 2024 - Written by John Cameron


After failing to make a significant challenge on 1.1700 on Wednesday, the Pound to Euro (GBP/EUR) exchange rate dipped to just below 1.1670 before a fresh recovery to 1.1690 on Thursday.

Solid UK housing data, hawkish MPC rhetoric and expectations that the ECB will signal a June rate cut have supported the Pound.

Notably dovish ECB rhetoric may, however, still be needed to propel GBP/EUR above 1.1700.

Interest rate decisions, forward guidance and market expectations will remain key elements for the Pound in the short term.

The latest UK RICS housing-sector data recorded a further improvement in the headline figure to -4 from -10 previously and compared with consensus forecasts of -6.

This was the strongest headline figure since October 2022 while buyer interest was at the highest level since February 2022.

According to the survey; “buyer demand continues to edge higher, while near-term expectations point to activity gaining further traction over the coming months. Alongside this, house prices have stabilised at the headline level, with forward-looking metrics suggesting that an upward trend may emerge later in the year.”

Following Wednesday’s US inflation data, markets expect that the Bank of England will cut rates ahead of the Federal Reserve while the ECB will cut before both of them.

Money markets are currently pricing in two BoE rate cuts this year with a first move fully priced in for August.

MPC member Greene has pushed back against market expectations that the BoE will cut ahead of the Fed.

According to Greene; "The markets are moving rate cut bets in the wrong direction."

She did note that there has been encouraging news on UK wage growth and services inflation in recent months and the risk of inflation persistence is diminishing.

Nevertheless, she added that they remain higher than in other advanced economies, particularly the US.

She pointed to underlying UK wage pressures; “Higher inflation expectations have translated into higher pay growth, by some metrics now between 6-7 per cent in the UK versus 4-5.5 per cent in the US. Such sticky wage growth is a significant component of services inflation.”

She added; “It will need to slow further to see services inflation return sustainably to target-consistent levels. This last mile may prove the hardest. UK services inflation remains much higher than in the US.”

The ECB will announce its interest rate decision on Thursday. There are strong expectations that the bank will hold interest rates steady with the refi rate holding at 4.5%.

There are also strong expectations that the bank will signal a rate cut of 25 basis points for the June meeting.

According to Credit Agricole; “we expect President Christine Lagarde to 'pre-announce' a June rate cut. Moreover, the updated forward guidance could signal that further easing could be on the cards in coming months.”

MUFG noted the possibility that of slightly more hawkish than expected guidance after yesterday’s US data with the risk that a weaker currency will put upward pressure on prices.

According to MUFG; “it certainly makes it much more likely that if the ECB does signal a June rate cut is coming that it will be accompanied by a message that decisions will be meeting-by-meeting and that the ECB will not be on auto-pilot in cutting rates going forward.”

ING expects overall yield spreads will undermine the Euro in global markets.

ING also points to Euro risks from geo-political stresses and added; “the increasing risk of a retaliatory strike from Iran or its proxies against Israel will only push crude oil prices further ahead and damage the euro's terms of trade again.”

The Pound will also tend to be vulnerable if there is a wider spike in risk aversion, limiting any positive GBP/EUR impact.
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