GBP/EUR Rate Heads For Lowest Daily Close Since May

Image © Pound Sterling Live

The Pound to Euro exchange rate is on course to register its lowest daily closing rate since May as a protracted selloff extends amidst a rapid increase in bets for Bank of England rate cuts in 2024.

This week, the market has brought forward the anticipated timing of the first cut and the number of cuts that will fall next year, but one analyst says the market has taken it too far.

"Given the repricing of BoE rate cuts and the bank’s economic outlook, we believe that many negatives are already in the price of the GBP," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

The Pound has slumped against the Euro and Dollar this week, and Crédit Agricole says blame can be pinned on increasingly aggressive bets for Bank of England rate cuts in 2024.

"The pricing in of BoE easing has gathered pace in recent days with UK rates markets expecting more than three rate cuts in 2024 at the time of writing," says Marinov.

The Pound to Euro exchange rate has fallen every day this week, currently at 1.1435, and looks set to close at its lowest level since May 05.

Marinov says other G10 money markets are also seeing bets for rate cuts ramped up, but "the downgrade to the BoE rate outlook has been more aggressive, and the GBP's relative rate appeal has suffered as a result".

This can be seen in the below chart that shows the Pound-Euro in the top panel, shown at daily intervals, and the difference between the UK two-year bond yield and that of Germany's.

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.

The chart shows that the spread between two-year bond yields narrows as UK rate cut expectations accelerate, which drags on Pound-Euro.

"While the GBP was able to regain some ground vs the broadly weaker USD, it clearly lagged against the EUR for example," says Marinov.

This week, markets boosted rate cut bets following comments from Bank of England Chief Economist Huw Pill, who openly condoned the market's current expectations for cuts by mid-2024.

He is one of the only major central bankers we know of who has done this.

"This was the first time a Bank insider had talked positively about loosening policy and contrasted with Pill's previous comments about a 'Table Mountain' profile for rates, so this intervention appeared significant," says Andrew Goodwin, Chief UK Economist at Oxford Economics.

UK economic data has helped the build-up in bets for UK rate cuts, even as this week's numbers have come in ahead of expectations (house prices and Q3 GDP).

"Among the drivers of the latest moves in UK rates markets seems to be a build-up of economic data disappointments as well as comments by the BoE’s Chief Economist Huw Pill suggesting that the MPC is done hiking rates," says Marinov.

All that being said, Crédit Agricole believes that rates markets are overreacting to what its analysts still consider to be fairly neutral and very data-dependent forward guidance by the Bank of England

"Indeed, we note that BoE Governor Andrew Bailey in particular did not rule out future hikes and emphasized the bank’s focus on bringing inflation under control," says Marinov.

Looking ahead, Crédit Agricole says, given the repricing of BoE rate cuts and the bank’s economic outlook, many negatives are already in the price of the GBP.

"It would thus take downside surprises from next week’s data to see GBP’s underperformance extending in the very near term," according to Marinov.