Pound Euro (GBP/EUR) exchange rate retains upside as Euro investors downcast
The Pound Euro (GBP/EUR) exchange rate has continued to trend upwards this morning as yesterday’s interest rate decision and commentary from the European Central Bank (ECB) remains at the forefront of investors’ minds.
At the time of writing, GBP/EUR is trading at €1.1722, having risen by almost 0.3% in the past 24 hours.
Euro (EUR) sinks as investors digest ECB commentary
The Euro (EUR) is trading lower against its peers this morning following yesterday’s events, subdued by expectations of imminent interest rate cuts.
While ECB President Christine Lagarde attempted to deter speculation among investors, traders remain convinced that weak economic performance in the Eurozone spells a loosening of restrictive monetary policy measures. In the press conference following the bank’s interest rate decision, Lagarde noted:
‘We need to be further along in the disinflation process before we are confident about hitting the inflation target in a timely manner’; yet observations of likely economic stagnation and projected weakness in the near term gave a mixed message.
Further dampening the single currency today is a worse-than-expected German consumer confidence release. February’s reading has come in at –29.4 rather than the –24.5 forecast, signalling a decline in income expectations.
Rolf Bürkl, consumer expert at NIM, observes: ‘With these results, hopes for a sustainable recovery in the consumer climate must be postponed further into the future.’
Pound (GBP) gains capped by risk-off mood
The Pound (GBP) resists sliding lower against its peers this morning but is unable to make significant gains as a downbeat market mood pressures risk-on currencies. Investors’ attention has turned to next week’s interest rate decisions from the Bank of England (BoE) and the Federal Reserve, with speculation growing around policymakers’ rate cutting stance.
UK data has been mixed this week, with Wednesday’s PMIs printing above forecasts but the Confederation of British Industry (CBI)’s retail data disappointing expectations. Inflationary pressures remain high, however, leading the majority to predict hawkish rhetoric from the Bank of England (BoE).
Economists note that unlike the ECB and the Fed, BoE policymakers have not offered a timeframe or projections for interest rate cuts so far. On the other hand, the UK central bank must be aware of the dangers of prolonging restrictive policy measures.
A Reuters poll showed that economists saw no chance of a rate cut on 1 February, but some expected one before mid-2024; prompting investors to consider the likelihood of policy action in May.
Economists at HSBC said in a note to clients: ‘For that expectation to be realised, we think the BoE needs to at least seem open to the idea in February.’
Meanwhile, a risk-off mood keeps a lid on Sterling movement for the time being.
GBP/EUR forecast: US data to influence the Euro?
This afternoon, the latest core PCE price index from the US is predicted to show an increase in price pressures, potentially prompting US Dollar (USD) investors to dial back rate cut expectations for the Federal Reserve. This may have a detrimental effect on market sentiment, as markets consider the effects of prolonged restrictive monetary policy in the world’s largest economy.
The data could have an especially pronounced effect upon the Euro, given the negative correlation between EUR and the ‘Greenback’. If the US Dollar climbs amid expectations of a hawkish Fed, the single currency is likely to trend lower.
Elsewhere, geopolitical tensions may continue to weigh upon market morale, limiting gains for both the Pound and the Euro. Nevertheless, the Euro is the comparatively safer of the two currencies – risk aversion is likely to weigh disproportionately upon GBP.