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GBP/EUR Exchange Rate Consolidates Below Key Resistance

May 27, 2024 - Written by John Cameron


Pound Supported by Disappointing German Data, GBP/EUR Consolidates Below Key Resistance

The Pound to Euro exchange rate (GBP/EUR) held firm on Monday and traded around 1.1745.

Trading volumes were inevitably low with UK markets on holiday while US markets will also be closed on Monday.

The Euro was hampered by weaker-than-expected German business confidence data while overall Pound sentiment held firm.

Overall confidence in the Euro-Zone economy has improved during May, but the latest data represented a setback.

The German IFO business confidence index was unchanged at 89.3 for May and compared with consensus forecasts of a further recovery to 90.4.

Although the expectations component improved to 90.4 from 89.7 previously, there was a dip in the current conditions index to 88.3 from 88.9.

According to the IFO; "The German economy is gradually working its way out of the crisis.”

There are still very strong expectations that the ECB will cut interest rates at the June meeting and this view was endorsed by ECB chief economist Lane.

In comments on Monday, Lane stated that; “Barring major surprises, at this point in time there is enough in what we see to remove the top level of restriction."

Lane was still cautious over the outlook for a series of rate cuts.

In this context he added; "The best way to frame the debate this year is that we still need to be restrictive all year long."

Markets do not expect that the ECB will cut again at the July meeting with the potential for at least one further rate cut by the end of 2024.

As far as the June decision is concerned, Danske Bank commented; “we expect the rate cut to be formulated as a roll-back of the 'insurance hike' from September last year. We expect the ECB to repeat the meeting-by-meeting and data-dependent approach to the policy rate path beyond June.”

The bank has, however, revised its medium-term outlook; “We have revised our ECB rate path for the first time in more than 12 months and now expect the ECB to deliver two rate cuts this year (June and December), and three cuts next year. This will bring the deposit rate at 2.75% by the end of 2025.”

Markets were continuing to monitor the UK General Election campaign and whether markets would take notice.

MUFG expects a Labour government will look to reverse some of the current government’s tax cuts to help fund an increase government spending but expects a prudent policy.

According to MUFG; “Similar to the current government, a Labour government would find that it’s room to run looser fiscal policy will be curtailed by the appetite of the gilt market to absorb higher deficits. We expect that they would be keen to avoid a repeat of the gilt market sell-off in the autumn of 2022 when the BOE had to step to provide support.”

As far as trade policy is concerned, it added; “We are not expecting to see a significant easing of trade frictions that would be required to encourage a stronger GBP.

Caxton strategist David Stritch doubts that the Pound can advance much further after gains following last week’s inflation data; “the market is recovering from its knee-jerk reaction and the spike in gilt yields that followed and sterling is weakening as a result, although, sterling is showing remarkable resilience and has stemmed a fall towards its pre-inflation levels to simply plateau against its peers.”

The latest COT data, released by the CFTC, recorded a notable covering of short Pound positions during the week with a small net long position compared with a short position of over 20,000 the previous week.

This took place before the latest inflation data.

There was also an increase in long Euro positions during the week which should limit the GBP/EUR impact.
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