GBP/EUR Exchange Rate Retreats from Key Resistance Level

May 24, 2024 - Written by John Cameron

STORY LINK GBP/EUR Exchange Rate Retreats from Key Resistance Level

The Pound to Euro exchange rate (GBP/EUR) came close to touching the key 1.1765 level in early Europe on Thursday before a limited retreat to just below 1.1740 after a mixed round of UK business confidence data and further evidence of a Euro-Zone rebound.

The 1.1765 area remains a key resistance area.

Late on Tuesday, Prime Minister Sunak called a General Election for July 4th.

Opinion polls indicate a very strong Labour lead of around 20 basis points with expectations of a solid Labour majority.

According to ING; “Crucially, many of the volatility-inducing events that had been associated with UK politics in previous years (UK-EU trade relationships, unfunded budget spending, the Scottish referendum) all seem to be rather marginal risks now.”

MUFG added; “While the general election will raise political uncertainty in the UK in the coming months which could be viewed as modestly bearish for the pound, the election impact should be limited.”

According to TD Securities "A Labour win with prospects of a softer Brexit are GBP+, especially vs EUR."

It added; "However, GBP is likely to trade on this only around the election date as inflation and rate divergence remain the primary FX drivers, especially into first cuts."

In this context, economic data releases will continue to be monitored closely.

Following the latest inflation data, Danske has changed its forecasts on interest rates. It commented; “Worryingly, alongside the big BoE forecast miss, the momentum in service inflation picked up in April. Likewise, wage growth remains elevated with the labour market still tight by historical standards.”

It added; “Following today's topside surprise and the May print unlikely to deliver an equally large downside surprise to sway the majority of the MPC to vote for a cut, we now expect the first 25bp cut in August.”

The UK PMI data was mixed. The manufacturing index strengthened to a 22-month high of 51.3 from 49.1 previously and compared with consensus forecasts of 49.5.

The services sector, however, retreated to a 6-month low of 52.9 from 55.0 and below market expectations of 54.7.

The rate of increase in prices charged slowed to the lowest level since February 2021.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence commented; “The flash PMI survey data for May signalled a further expansion of UK business activity, suggesting the economy continues to recover from the mild recession seen late last year.

It expects GDP growth of 0.3% for the second quarter.

He added; “With companies now reporting the slowest price growth in over three years, and headline inflation falling close to target, the PMI data support the view that the Bank of England will start cutting interest rates in August providing the data continue to move in the right direction over the summer.”

The Bank of England is very unlikely to cut interest rates in June given that it will be in the middle of the General Election campaign.

The German PMI manufacturing index recovered to 45.4 for May from 42.5 and compared with consensus forecasts of 43.4.

The services-sector index also strengthened to 53.9 from 53.2 and slightly above expectations of 53.5.

As far as the Euro-Zone is concerned, the manufacturing sector index improved to a 15-month high of 47.4 for May from 45.7 previously and above forecasts of 46.2.

The services-sector index held at 53.3 and slightly below expectations of 53.6 with the composite output index at a 12-month high.

The pace of output price inflation softened in May with the slowest rate of increase since November 2023.

Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, commented “This looks as good as it could be. The PMI composite for May indicates growth for three months straight and that the eurozone’s economy is gathering further strength.”

He noted the inflation data and added; “This will be supportive for the apparent stance of the ECB to cut rates at the meeting on June 6. However, the better inflation outlook will be most probably not be enough for the central bank to announce that further rate cuts will follow suit.”

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TAGS: Pound Euro Forecasts