Pound to Euro Rate Consolidates Above 1-Week Lows Ahead of BoE

May 7, 2024 - Written by David Woodsmith

STORY LINK Pound to Euro Rate Consolidates Above 1-Week Lows Ahead of BoE

The Pound to Euro exchange rate (GBP/EUR) dipped to 1-week lows just below 1.1650 on Friday before a tentative recovery to 1.1665.

Growth prospects and monetary policies will remain key elements in the short term with market positioning ahead of this Thursday’s Bank of England (BoE) policy meeting also important.

MUFG expects a dovish BoE stance will trigger GBP/EUR losses towards 1.15.

Latest COT data, released by the CFTC, recorded a further net increase in short, speculative Pound positions to 29,000 contracts from 26,200 the previous week and the largest short position since December 2022.

The shift in positioning will tend to limit the potential for further Pound selling.

Risk conditions will also be important with on-going strength in equities helping to underpin the UK currency.

As far as the Euro-Zone economy is concerned, the final reading for the Euro-Zone PMI services-sector index was revised higher to 53.3 from the flash reading of 52.9. This was stronger than the previous reading of 51.5 and an 11-month high.

Overall business confidence edged lower from the 25-month high recorded previously while output charges increased at a faster rate on the month.

Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, commented; “This looks pretty nice. Service providers have now expanded their activity for the third consecutive month, putting an end to the lack of dynamism observed in the second half of last year.”

He also commented on the cost pressures; “the PMI index for operating costs in the service sector, which largely comprises unit labour costs, has continued to increase at a rapid pace over the past twelve months, following a sharp uptick in 2022. The ECB is cognizant of this trend and is likely to proceed cautiously with regards to the extent of rate cuts.”

In comments over the weekend, ECB chief economist Lane commented; “Both the preliminary estimate of eurozone inflation in April and the published GDP data for the first quarter improve my confidence that inflation will soon return to the target. So today my confidence level has improved compared to our April meeting. But of course we will receive more data between now and June.”

Markets remain extremely confident that the ECB will cut interest rates at the June policy meeting, but rhetoric from central bank officials will continue to be watched closely, especially given the importance of medium-term expectations.

JP Morgan had expected four ECB rate cuts in 2024, but has now adjusted the forecast and now expects three due to domestic and global influences.

As far as the BoE expectations are concerned, markets do not expect a rate cut at this week’s meeting. If rates are held at 5.25%, forward guidance will be crucial for the Pound.

According to MUFG; “We expect the updated forecasts to indicate a lower probability of inflation overshooting the BoE’s inflation target over the forecast period. In light of these developments, we have held on to our forecast for the BoE to begin cutting rates sooner in June.”

MUFG added; “Further evidence that the BoE is moving closer to cutting rates could trigger a weaker GBP moving it back towards the bottom of current trading ranges against the EUR and USD. However, improving cyclical momentum for the UK economy and still supportive conditions for higher yielding carry currencies should prevent a sharper sell-off for the GBP.”

ING expects a less dovish stance; “Expect an optimistic air to Thursday’s meeting but we think the Bank will stop short of rewriting its forward guidance, which would be tantamount to endorsing a June rate cut at a time when the near-term direction of UK inflation is still uncertain.”

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TAGS: Pound Euro Forecasts