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By James Elliot
Published: May 28, 2024 at 16:00
Updated: May 28, 2024 at 16:27
EURGBP is back at the 0.85 level for the third time this year and dropped briefly below.
EUR to GBP
Markets have priced out a June cut from the Bank of England (<a href="/news/c/bank-of-england.html">BoE</a>) and may be worried about sticky services inflation. There does not seem to be sufficient drivers currently for a sustained break of 0.85, but data over summer could change that. Markets are sliding on Tuesday after a long weekend in the UK and US. The FTSE is –0.7%, the DAX is –0.45% and the S&P500 is lower by –0.2%. This follows on from some bearish patterns in stock markets at the end of last week prompted by some hawkish comments in the FOMC minutes from the May meeting. Currencies, meanwhile, don’t reflect the risk off tone as dollar pairs are mostly positive and the Yen is flat. EURUSD and GBPUSD are both +0.1% which means EURGBP is unchanged and stuck at 0.85 support. This level will be a focus in the week ahead as it has acted as a floor in 2023 and 2024. However, it has been tested three times this year already and the more times it is relied on, the more likely it is to break. Around one month ago, EURGBP was trading around 0.863 and it looked like it could keep rallying to reach 0.87 resistance. Fast forward to this week and it is back at 0.85 having made a new 2024 low of 0.8495. The fast turnaround is mostly due to the CPI beat last week which has made a June cut from the BoE very unlikely. Indeed, with services inflation and wage growth both still uncomfortably high, markets are wondering if the Bank will cut this side of Q4. At the other side of the equation, the ECB are firmly set to cut in June and are likely to cut at least once more soon afterwards. The question for markets is whether they will cut a third time or leave it a two. The odds have shifted recently in slight favour of the latter which reflects the more hawkish pricing seen across most markets and the better economic data out of the eurozone in recent months. One key driver for the pound going forward is whether markets will swing too far with hawkish expectations. There is a tendency to go from one extreme to another and after getting hopes up for a June cut, they may overlook August and focus on September or even Q4 should data remain too hot. Realistically, August has been and remains the most likely time for a first cut, but clearly there needs to be more cooling in services before the BoE can justify it. Under the current conditions, it does seem EURGBP won’t remain under 0.85 for long. It would likely take a larger policy divergence between the ECB and BoE for a sustained downtrend and this is only likely to happen if the ECB were to commit to three cuts (due to deteriorating data) and the BoE delays further due to sticky inflation. Both of these scenarios would take several months to play out and the market pricing suggests they are unlikely. Here’s ING with some thoughts: “After printing below 0.8500, it appears that EUR/GBP was lacking enough bearish momentum yesterday – possibly also due to thinner liquidity – but we also suspect the FX market may not want to chase the pair too low given an increasingly split BoE MPC in spite of volatile inflation and wages data. Our view is that economic data next month will prove supportive of a rate cut in August.” A 0.85-0.87 range seems the most likely scenario over the summer while new data is assessed. Markets will also want to see the impact of the ECB’s June cut before making too many assumptions. No-one really know how the economy and markets will react, even though the move is well signposted and fully priced in. EURGBP Back at 0.85
James Elliot
Contributing Analyst
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