GBP/EUR Rate Etches A Path Back Towards the Top of the Range

Above: File image of ECB President Christine Lagarde. Copyrights: Angela Morant/ European Central Bank.

The Pound to Euro exchange rate looks intent on rising towards the top of its summer range near 1.17 based on recent market developments that include fresh signs the European Central Bank (ECB) has completed its interest rate hiking cycle.

A number of ECB Governing Council members indicated at an IMF event in Morrocco that the time to pause the rate hiking cycle had come and that it would be prudent to await fresh data early in 2024 before making any further adjustments to rates.

"The central message remains that rates are at an appropriate level to bring inflation back to target unless we see hawkish surprises," says Daragh Maher, Head of Research for the Americas at HSBC.

Given the incoming guidance, markets are pricing "close to zero chance of another hike in the eurozone, and the rather cautious tone by ECB speakers is probably helping this dovish view," says Franceso Pesole, a strategist at ING.

The 'dovish' view is evident in the Euro's recent decline against Pound Sterling in particular, which some analysts say can extend.

"The euro remains rather unattractive compared to the higher-yielding pound, and the decline in EUR/GBP may have more room to go from current levels. A move below 0.8600 in the near term is possible," says Francesco Pesole, FX Strategist at ING Bank.

(A move below 0.86 in EURGBP implies a rise to 1.163 in Pound-Euro terms).

Recent Euro underperformance can be in part attributed to the market's opinion on where interest rates are going in the UK and Eurozone, with Bank of England Chief Economist Huw Pill saying Thursday there remains a chance interest rates rise in November.

The noncommittal guidance will limit losses in UK bond yields and thereby confer support to the Pound on margin.

As noted by strategists at Westpac, the market's move to 'price out' further Bank of England rate hikes over the course of September has primarily run its course, lending the Pound some stability following a sizeable selloff.

At the other end of the equation, the market appears to be reacting to incoming signals that the European Central Bank has completed its own rate hiking cycle, implying some downshift in the Euro can occur.

Minutes from the ECB's September policy decision, where interest rates were again raised by 25 basis points, suggest no further rate hikes are likely in this cycle.

The minutes reveal the decision to hike rates by 25bp was close and that it would be prudent to wait for Q1 2024's wage data before considering another rate move.

"The tone of the account was more relaxed compared to previous accounts, illustrating growing confidence that the past measures would be sufficient to bring inflation back to the target," says Jan von Gerich,
Chief Analyst at Nordea Bank.

Given these developments, the Pound can continue to appreciate against the Euro but will almost certainly respect the boundaries of the summer range:

Above: GBPEUR at daily intervals with the outline of a multi-week range illustrated. Set up a daily rate alert email to track your exchange rate OR set an alert for when your ideal exchange rate is triggered ➡ find out more.

"There are downside risks for the euro, but not very big considering markets have already priced out tightening expectations," says Pesole.

Technical boundaries and the modest scope for any meaningful repricing of central bank expectations in the Eurozone and UK can keep the Pound-Euro exchange rate contained between 1.15 to the bottom and 1.1765 to the bottom.

Strategists at Westpac are also playing this range via a sell recommendation on EURGBP that targets a move to 0.8698.

Above: EURGBP at daily intervals with boundaries set out by Westpac's EURGBP sell strategy annotated. Set up a daily rate alert email to track your exchange rate OR set an alert for when your ideal exchange rate is triggered ➡ find out more.