GBP/EUR Exchange Rate Retreat Leaves Slow-footed Buyers Regretting A Missed Chance

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The Pound to Euro exchange rate has once again been rejected at a pivotal technical level, meaning those who failed to buy euros at 25-week highs have been left disappointed.

Pound-Euro is the biggest and most important currency pair for UK personal transactions and holiday money purchases, and it reached a spot rate of 1.1768 on Tuesday following the release of stronger-than-expected UK wage data.

But, 24 hours later and UK inflation undershot market expectations, leading to a broad selloff in the Pound, leaving Pound-Euro some 0.30% lower on the day at 1.1722.

So where buyers could achieve in excess of 1.17 on GBP/EUR through Tuesday and early Wednesday, retail rates are now well below this big figure and closer to 1.1650, although some providers are offering rates closer to 1.1775.

The failure at 1.1765 was something we were always wary of, noting that the exchange rate has struggled to move beyond here since 2022, with the charts showing a horizontal resistance line located in the region:

Above: GBP/EUR at daily intervals showing strong resistance near current levels. Track GBP with your own custom rate alerts. Set Up Here

There is now a strong prospect that Pound-Euro pulls back into the middle of this range, as it has done on numerous occasions since 2022.

"We expect the UK economy to perform relatively worse than the euro area and expect relative growth outlooks and broad central bank pricing to weigh on GBP. We target the cross at 0.88 in 6-12M," says Kirstine Kundby-Nielsen, an Analyst at Danske Bank. (EUR/GBP at 0.88 = GBP/EUR at 1.1364).

UK inflation printed unchanged at 4.0% year-on-year in January, according to the ONS, surprising a market that expected a rise to 4.2%.

Looking under the hood of the data reveals that a strong disinflation trend is underway in the UK that should bring inflation to the 2.0% target as soon as April, raising hopes that the Bank of England will cut interest rates as soon as May.

This is good news for UK consumers and businesses, but for those looking for a stronger Pound it could signal 2024's outperformance is at risk of fading.

Other variables will, of course, be at play, in particular, the performance of the Eurozone.

We note that the Eurozone faces disinflationary dynamics similar to the UK's, but the growth outlook there is particularly challenging owing to an apparent deindustrialisation process underway in Germany.

This leads Jane Foley, Senior Foreign Exchange Strategist at Rabobank, to forecast the Pound to Euro exchange rate can rise further over the coming months.

"Given the headwinds facing the German economy... we would favour buying GBP on dips vs. the EUR," says Foley.

Rabobank forecasts Euro-Pound at 0.84 "in the latter part of the year", which equates to a Pound-Euro peak at around 1.19.

So, while the Pound can eventually break to fresh highs, a great dose of patience might be required from Euro buyers.