Pound to Euro Rate Outlook: 1.11s Call

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The British Pound could stay under pressure against the Euro as long as the Federal Reserve continues its 'hawkish' messaging say analysts, with a breakdown in GBP/EUR into the 1.11s looking possible.

The Dollar was the clear beneficiary of Federal Reserve Chair Jerome Powell's message on Tuesday that U.S. interest rates would have to rise higher than previously expected.

The Pound was, on the other hand, a clear loser. "This is because the pound has a higher sensitivity to risk sentiment," says Francesco Pesole, a foreign exchange strategist at ING Bank.

Interest rates in the U.S. and other global markets rose as investors priced in higher Federal Reserve rates, which acts as a drag on stocks.

The negative investor environment meanwhile weighs on 'high beta' currencies such as the Pound which tends to struggle when investors are acting defensively.

"Short-dated U.S. Treasury yields increased in the aftermath of Fed Chair Powell's comments, with 2-year yields increasing above 5%, more than 100bp above the 10-year yield. Broad U.S. dollar strength pulled GBP/USD down towards 1.18 from above 1.20. Sterling also lost ground against the euro," says Lloyds Bank in a regular daily market note.

The Pound to Euro exchange rate (GBP/EUR) is at 1.1230 at the time of writing, which puts it below its average value for the past two weeks at 1.13.

EUR/GBP is meanwhile at 0.8905, above its two-week average at 0.8850.

"EUR/GBP faces upside risks every time the Fed's hawkish messaging hits risk sentiment," says Pesole. (If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.)



 

Hamstrung by the Central Bank

The Federal Reserve appears intent on raising interest rates by another 50 basis points later in March as it deals with elevated inflation and stronger-than-expected economic data.

The European Central Bank (ECB) has also indicated a willingness to hike by 50bp.

But the Bank of England is meanwhile close to ending its interest rate hiking cycle, based on evidence provided by Bank of England Governor Andrew Bailey in a speech last week.

This contrasts with the European Central Bank (ECB) which is sending a clear message that it intends to continue hiking until inflation in the Eurozone comes down.

"Incidentally, at the current juncture, the euro is looking more attractive than the pound, thanks to the ongoing hawkish repricing in ECB rate expectations and a more encouraging domestic outlook," says Pesole.


GBPEUR trading heavy

Above: GBP/EUR at one-day intervals with the 2-week average (blue line). Consider setting a free FX rate alert here to better time your payment requirements.


However, assumptions that the Eurozone economy is doing better than its UK counterpart were challenged on Wednesday by Eurozone GDP data for the final quarter of 2022 that showed the region was suffering a sharp pullback, led by a sharp deterioration in consumption and investment.

If this underperformance is reflected in upcoming data it could prompt more caution from the ECB on interest rates, and offer GBP/EUR support above 1.11.

Pesole's views do nevertheless speak to the persistent 'perma bear' assumption that still exists with regard to the UK economy and the Pound, something that will be hard to shake.

"Like the euro, the pound is lacking internal drivers this week, but in light of the deterioration in sentiment and the euro’s better fundamentals, we continue to see moderate upside risks for the pair," says Pesole.

The analyst says a break in EUR/GBP above the 0.8922 17 February high setting the next key resistances at 0.8950 first, and the 0.8970 February high then.

From a Pound to Euro perspective, this gives a break lower in GBP/EUR to 1.1208, then 1.1173 and finally 1.1150.