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GBP/EUR Exchange Rate Nears 2-Week Best Ahead of Crucial UK Inflation

May 20, 2024 - Written by John Cameron


The Pound to Euro (GBP/EUR) exchange rate strengthened to 2-week highs at 1.1690 on Friday before settling just below 1.1680 on Monday.

The latest UK inflation data will be crucial for the Pound this week and the latest PMI business confidence data will also be a key element.

Rightmove data recorded an increase in UK house prices of 0.8% for May after a 1.1% gain previously. Prices increased 0.6% over the year to a fresh record high.

Seasonal trends remain a key market element with May typically a strong month for the housing sector.

Tim Bannister, Rightmove’s director of property science, commented; “The momentum of the spring selling season has exerted enough upwards price pressure to reach a new record asking price.”

Rightmove added; “Pent-up demand from would-be buyers who paused their plans last year is a key driver behind increased home mover activity despite mortgage rates remaining elevated for longer than anticipated.”

The latest COT data recorded a small decline in short non-commercial Pound positions to just above 20,000 contracts in the latest week from close to 22,000 the previous week.

The data suggests little enthusiasm for buying the Pound at this stage, but there will be scope for short covering if the spot rate can make further gains.

The key event this week will be the latest UK inflation data on Wednesday.

ING commented; “Wednesday’s CPI print in the UK will be a pivotal moment for the pound. In our view, inflation data for April holds the keys to a June rate cut by the Bank of England.”

MUFG added; “Recent comments from BoE officials including Chief Economist Pill and MPC member Greene have indicated that the BoE could be in a position to begin cutting rates as soon as at the June MPC meeting if upcoming economic data releases help to further ease concerns over inflation persistence.”

Consensus forecasts are for the headline rate to slide to 2.1% for April from 3.2% previously and this would be lowest reading since August 2021.

The headline rate will be dragged lower by favourable base effects and the drop in retail energy prices from April 1st.

The core inflation rate is expected to decline to 3.6% from 4.2% which would be the lowest reading since November 2021.

According to ING; “Our economics team thinks that services inflation will come slightly hotter than the BoE’s forecast, which should tilt the balance in favour of August for the first cut. This is, however, a close call – and potentially a very binary event for the pound as bets on a June rate cut could swing substantially.”

ING added; “If we are right with our CPI call, expect sterling to have a good week.

It sees scope for GBP/EUR to advance to 1.1725.

From a medium-term perspective, ING still expects significant losses for GBP/EUR as the BoE does cut interest rates.

The European PMI business confidence readings on Thursday will be important for Euro-Zone sentiment.

Consensus forecasts are for a further small improvement in the services sector with a net improvement in manufacturing, but still in contraction territory.

There are very strong expectations of a June ECB rate cut and the PMI data is unlikely to have a significant impact on these expectations.

Cost and prices data within the data will, however, be significant for medium-term interest rate expectations.

According to Nordea; “continued gradual rate cuts look likely as long as the ECB staff forecasts see inflation at target in the medium term and the level of rates is seen to be restrictive.”

It added; “we keep our ECB forecasts unchanged, seeing the first move in June, a total of three cuts this year and four cuts next year.”
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