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Pound to Euro Rockets to 2-Month Best as Snap UK General Election Called

May 23, 2024 - Written by David Woodsmith


Although the UK inflation rate declined sharply for April with the lowest headline reading for close to three years, the decline was smaller than expected and services-sector inflation remains notably stubborn.

Markets considered that the chances of a June rate cut had dipped to below 20% from 50% ahead of the data. The chances of an August cut dipped below 50% and traders are now fully pricing in only one rate cut this year.

UK yields moved sharply higher while equity markets came under pressure.

The Pound surged in global markets with the Pound to Euro (GBP/EUR) exchange rate jumping to 2-month highs just above 1.1740.

According to MUFG; “A more delayed start to the BoE rate cut cycle alongside the still high yields on offer in the UK will encourage a stronger pound in the near-term.”

Markets will be monitoring key resistance around 1.1765.

The latest business confidence data on Thursday will also be important for Pound sentiment.

UK consumer prices increased 0.3% for April with the year-on-year inflation rate dipping sharply to 2.3% from 3.2% the previous year.

This was the lowest reading since July 2021, but above consensus forecasts of 2.1%.

The core inflation rate declined to 3.9% from 4.2%, but well above market expectations of a slide to 3.6%.

According to the ONS; “Falling gas and electricity prices resulted in the largest downward contributions to the monthly change in both CPIH and CPI annual rates, while the largest, partially offsetting, upward contribution came from motor fuels.”

The goods inflation rate dipped to -0.8% for the year from 0.8% previously while there was only a marginal decline in services-sector inflation to 5.9% from 6.0%.

This reading was well above the BoE’s forecast of 5.5%.

ING commented; “We’ve long felt that this reading had the potential to be highly volatile owing to a multitude of annual price hikes that kick in at the start of the financial year, and that’s exactly what we’ve seen.”

Energy prices fell 27.1% in the year to April, the largest drop since records started in 1989.

Prices of food and non-alcoholic beverages rose 2.9% in the year to April from 4% in March and the 13th successive decline.

Yael Selfin, chief economist at KPMG UK, commented; “This may still not be enough to convince more cautious MPC members to commit to a rate cut in June, especially while wage growth remains elevated and economic growth momentum is strong.

She added; “Our forecast sees further declines in headline inflation, which could for a time bring the annual rate below 2pc, potentially picking up slightly early in 2025. That could leave enough margin for the MPC to start easing rates in August while keeping the overall monetary policy stance tight for at least another year.”

According to Luke Bartholomew, senior economist at asset manager abrdn; "While inflation continues to fall sharply, this report will come as a disappointment to the Bank of England and investors looking for a rate cut in June."

He added; "In particular the strength of core inflation and services inflation, both of which came in a fair bit stronger than expected, will make it harder for the Bank to feel confident that underlying inflation pressure is cooling adequately."

According to ING there is an important element of uncertainty; “The figures therefore aren’t a total game-changer for the Bank of England which will look at the numbers and see more noise than signal. But we think it does reduce the chances of a rate cut at June’s meeting, even though we’ll get another set of data before that decision.”

The bank noted divisions within the Monetary Policy Committee which will maintain a high degree of uncertainty.
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