Pound's Near-term Strength Against Euro Tipped to Extend

Image © Adobe Images

Pound Sterling's rise against the Euro can extend in the near term, according to several currency specialists we follow.

Francesco Pesole, FX Strategist at ING, says there is probably some further room for the Pound to appreciate against the Euro, as Bank of England rate expectations "appear more flexible to a hawkish repricing than the ECB ones".

The Pound to Euro exchange rate has risen some 100 points to 1.1630, having opened the year at 1.1535.

Gains follow the revision higher of December PMI survey data to show the economy returned to growth territory in a convincing fashion in the final month of the year, casting doubt on the need for imminent rate cuts at the Bank of England.

Market expectations for the scale of impending rate cuts rose markedly during the final quarter of the year, resulting in a soggy end to the year for one of 2023's best performers.

A subsequent 'hawkish' reversal of such expectations now offers Sterling support.

"The latest data releases for December provide further evidence that UK demand is stabilising following the soft patch in Q3," says a weekly currency strategy note from Barclays.

"Alongside still-high services inflation and wage growth, this points to further push-back by the MPC to the pricing of early/deep rate cuts," adds the note.

Kenneth Broux, a strategist at Société Générale, says it has been a strong start to 2024 for the Pound, and the retracement of Euro-Pound towards 0.86 potentially brings a return to the December low of around 0.8550 into play.

In Pound-Euro terms, this equates to 1.1630 and 1.17, respectively, the latter being a level our week ahead forecast anticipates.

Above: "Fastest increase in service sector activity for six months during December" - S&P Global.

Broux says the move dovetails with the 13bp widening of 2-year and 10-year bond yield differentials in favour of sterling.

"The pricing of aggressive future rate cuts by the ECB vs the BoE should keep a lid on EUR/GBP upside," he explains.

Above: 1.17 looks achievable in the near term, but confidence in any sustained residency above this level is low.

A highlight for the coming week is Wednesday's appearance of Bank of England Governor Andrew Bailey before parliamentarians.

We note the testimony relates to regulatory matters, although there is a high likelihood lawmakers will question Bailey on latest developments regarding the economy and the outlook for interest rates.

"The highlight of the week is Wednesday’s parliament testimony by Bank of England (BoE) Governor Andrew Bailey and Friday’s monthly GDP figures for the month of November. Overall, we expect a generally positive impact on sterling, especially in the crosses such as EUR/GBP, as Bailey may keep signalling a more cautious tone compared to the market on rate cuts and growth should bounce back in the November print," says ING's Pesole.

Track GBP, EUR and USD with your custom rate alerts. Set Up Here.

Barclays expects "further push-back" by the Bank of England to the pricing of early/deep rate cuts, in keeping with the (now hawkish) "Table Mountain" path for Bank Rate.

More generally, Barclays expects further demand-side outperformance versus the eurozone to continue supporting the Pound versus the Euro in the near term.

Barclays is constructive on Sterling's prospects over the duration of 2024, saying the prospect of a closer relationship with the EU following the upcoming general election, likely in H2 (and associated partial unwind of the Brexit premium), adding to the GBP's longer-term appeal.

But, ING's strategists aren't looking for a substantial rally in Pound-Euro, instead anticipating a broader decline over the medium-term.

"These are attractive levels to play a longer-term bullish view on the pair based on a deterioration of UK economic conditions and consequently more aggressive cuts by the BoE than the ECB," says Pesole.

The Bank of England has raised interest rates further than the ECB has in this cycle, which suggests it has more room to cut rates than its peers.

Should the Bank of England 'outcut' the ECB in the next cycle, the Pound-Euro exchange rate could turn lower.