Pound to Euro: Beware the "September Curse"

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Pound Sterling has fallen against the Euro and Dollar amidst a sizeable slump in global equity markets. However, supportive UK interest rate expectations can limit downside.

The Pound to Euro exchange rate is under sustained - albeit mild - selling pressure and could be set to record a fourth daily close in the red amidst a marked deterioration in global investor sentiment, confirming external factors are firmly in charge.

"The September curse strikes again," says Kathleen Brooks, research director at XTB. "Stock markets typically do badly in September."

Global equity markets fell and took GBP/EUR lower on Tuesday thanks to a combination of falling commodity prices and soft U.S. economic data that raised fears of a recession in the world's biggest economy. It serves as a reminder that the Pound tends to fall against the Euro and Dollar when global investor sentiment sours.

"The weak backdrop for equity markets going into the end of Q3 could weigh on the pound," says Boris Kovacevic, Global Macro Strategist at Convera. GBP/EUR peaked at 1.19 last week but has since eased back to 1.1860, meaning those buying euros are seeing rates at approximately €1.1815 with the most competitive providers.

"Investors turned cautious just on the knowledge that September is the only calendar month to average a negative return over the past 98 years. In other words, it may have been a self-fulfilling prophecy," says Charalampos Pissouros, Senior Investment Analyst at XM.com.

Investment bank consensus forecasts update: The end-2024 and 2025 guide from Corpay has been released. It shows a sizeable uplift was made to the consensus forecasts for GBP/EUR. Please request a copy here.

Markets were already under pressure heading into Tuesday's data docket, which spat out a trifecta of poor readings. The ISM manufacturing PMI release was softer than economists expected and showed price pressures facing the sector are rising once more. The spectre of firming inflation complicates the outlook as it implies the Federal Reserve can't simply ride to the rescue with big rate cuts.

Investor sentiment was further undermined by news that Nvidia - the mainstay of the 2024 rally in U.S. equities - was subpoenaed by the U.S. Department of Justice in an antitrust investigation. Because Nvidia is so fundamental to the current AI thesis that underpins the equity boom, any weakness can have a material impact.

There is a sense of déjà vu for investors who saw stocks slump at the start of August amidst concerns that the U.S. economy was heading for a recession. However, back then, Pound Sterling's decline was far more aggressive and GBP/EUR recorded a low at 1.16.

A Bank of England interest rate cut on August 01 complicated matters for the Pound and helped deliver those lows.

Yet, fundamentals remain supportive of Sterling, with the Bank of England's apparent reluctance to cut interest rates too fast being a key factor in why the Pound looks more robust in September.

"The British pound continues to put in solid performances and remains the top G10 currency so far in 2024," says Enrique Díaz-Alvarez, Chief Economist at Ebury. "The Bank of England is clearly in easing mode, although the resilience of the UK economy suggests that the pace of MPC rate cuts will be a gradual one. Markets are assigning no more than a 1-in-4 chance of another cut from the BoE in September."

"Resilient domestic demand, an economy that is performing better than expected... along with Sterling’s undeniably attractive valuation, continue to buoy the British currency," he adds.