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Pound to Euro Exchange Rate Retreats as Traders Fail to Break Key Resistance

June 5, 2024 - Written by David Woodsmith


After sharp losses ahead of Friday’s US open, the Pound to Euro (GBP/EUR) exchange rate found support close to 1.1710 but rallies stalled in the 1.1750 area and there was a net retreat to 1.1725 on Monday.

Given the overall fundamentals, ING expects further GBP/EUR selling interest on approach to 1.1765.

Although the ECB has effectively promised to cut interest rates at this week’s meeting, there are expectations that the central bank will push back against expectations of a series of rate cuts due to on-going reservations surrounding inflation trends.

Pound positions have also been cut after a failure to break key resistance.

The final Euro-Zone manufacturing PMI reading was revised marginally lower to 47.3 from the flash reading of 47.4.

Although there was a little change in the headline figure, overall sentiment increased to the highest level since February 2022.

There was little evidence of inflation pressures with manufacturing prices declining.

The German index hit a 4-month low while the Spanish index strengthened to a 26-month high.

Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, was positive towards the outlook; “This could be the turning point for the manufacturing sector. The industry is on the verge of halting the production decline that has persisted since April 2023. This is largely supported by more favourable trends in intermediate and capital goods.

After Friday’s market close, S&P cut the country's long-term sovereign debt rating to "AA-" from "AA" due to fiscal policy fears.

According to S&P; "The downgrade reflects our projection that, contrary to our previous expectations, France's general government debt as a share of GDP will increase as a result of larger-than-expected budget deficits over 2023-2027."

ING commented; “expect FX traders to be monitoring the French-German 10-year government bond spread today. This has been pretty steady inside of 50bp recently, but some modest widening today could generate some independent euro weakness on the crosses.”

There are very strong expectations that the ECB will cut interest rates at this week’s policy meeting with the refi rate lowered to 4.25% from 4.50%.

Assuming rates are cut, the bank’s inflation comments and forward guidance will be crucial.

According to ING; “Any signs of reflation and also stronger economic activity would limit the ECB’s room for manoeuvre. This is why we expect a hawkish cut and an ECB that will, at least at the press conference, try not to give any forward guidance.”

The final UK PMI manufacturing reading was revised marginally lower to 51.2 from the flash reading of 51.3, but overall business confidence strengthened to the highest level since early 2022.

Output inflation increased to the highest level for 12 months.

Rob Dobson, Director at S&P Global Market Intelligence, commented on inflation developments; “At the factory gate, output charge inflation strengthened for the fifth successive month and to its highest level in a year. That said, a solid easing in the rate of increase in input costs should help prevent price pressures from becoming embedded.”

Inflation expectations will remain important for the Bank of England and markets. ING commented; “The UK data calendar is also light this week, although of interest will be Thursday's release of the BoE's Decision Maker Panel on inflation expectations. One-year inflation expectations are forecast to have fallen further and could remind markets that they are being far too conservative in pricing barely more than one BoE rate cut this year. We look for three.”

The latest COT data, released by the CFTC, reported a strong increase in long, non-commercial Pound positions to over 25,000 contracts from just over 1,000 the previous week. This was the largest long position for six weeks.

There was also a boost to long Euro positioning in the latest week, limiting the scope for Euro buying.
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