- EUR/GBP fell to its lowest level in almost two-and-a-half years on Tuesday after divergent monetary policy expectations.
- Interest rates are expected to fall faster in Europe than in the UK, and the euro is expected to weaken against the pound.
- Wednesday promises to be a big day for the pair, with third-quarter eurozone GDP figures and the UK Chancellor's budget announcement.
The euro/pound exchange rate was just above 0.8300 on Tuesday, down a quarter of a percent on the day and close to the two-and-a-half year low of 0.8295 hit on October 18th. A break below these lows would be a significant bear market. development.
The euro (EUR) has weakened against the British pound (GBP) due to differences in central banks' monetary policy expectations, and EUR/GBP has been depreciating. The European Central Bank (ECB) is expected to cut interest rates lower than the Bank of England (BoE) in the remaining months of 2024, putting downward pressure on the single currency and EUR/GBP. This is because currencies with relatively low interest rates tend to depreciate due to capital outflow.
EUR/GBP daily chart
The market pricing of interest rate swaps provides a way to predict what central banks will do in the future, and these indicate 'almost 50% odds that the ECB will cut interest rates by 50 basis points (bps) (0.50%). ” is shown. According to FXStreet Editor Lalarit Srijandrun, the December meeting. This compares with the UK, where a Reuters poll of economists predicts the BoE will cut interest rates by just 25 basis points (0.25%) on November 7. Furthermore, a majority of nearly two-thirds of those surveyed expect the Bank of England to cut interest rates. Interest rates will remain unchanged in December.
Recent comments from ECB Governing Council members generally underline the possibility that the central bank will cut interest rates more aggressively as economic growth slows more than expected and inflation is falling more rapidly. I am doing it.
However, commentary has softened somewhat so far this week, providing some relief for the euro on Monday. European Central Bank (ECB) Vice President Luis Deguindos said the bank had made significant progress in curbing inflation but could not yet declare victory. “Domestic inflation remains high,” he said, suggesting interest rates should continue to rise, while also highlighting risks to growth, which would lower interest rates and ease the availability of credit. He suggested that this could be corrected.
Speaking ahead of DeGuindos, European Central Bank (ECB) policy commissioner Pierre Wunche said on Monday: “It is too early to discuss December's policy decisions.” He added that he felt there was “no urgency to further accelerate monetary easing” and that the downturn in September's inflation data could be explained by lower energy prices due to lower oil prices.
Wednesday will be a crucial day for the euro/pound as it will be the release of preliminary third-quarter euro zone gross domestic product (GDP) figures that will help shed light on growth in the region, as well as the UK budget statement in the UK. There is a possibility that it will happen.
The UK budget is likely to include a combination of tax increases and modest government spending, given that the New Labor government highlighted the £22bn black hole in the national coffers left by the previous Conservative government. Despite the expected tax rise, British consumers have not reacted by tightening, and growth is expected to continue at a “healthy clip”, according to Capital Economics. This suggests that sterling will remain supported.
“Overall, there is little evidence that the outlook for tax increases is making households more cautious about borrowing.The magnitude of the tax increases revealed in tomorrow's Budget will cause household borrowing and spending to slow slightly. “However, our central expectation is that the economy will expand in September, with decent growth of around 0.4% sequentially in the fourth quarter.” Paul Dales, chief UK economist at Capital Economics, said:
Meanwhile, GDP data for the euro area is expected to increase by 0.8% year-on-year in the third quarter (up 0.6% in the second quarter) and by 0.2% quarter-on-quarter (same as the previous quarter). An undershoot would weaken the euro and widen EUR/GBP's losses, while an overshoot would strengthen the case for a more cautious approach to rate cuts reflected in Monday's comments, allowing the euro and EUR/GBP to recover. Probably.
