Pound to Euro Rate Approaches the Top of the Range

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Pound Sterling's rise following mid-week inflation figures are currently offering excellent value to those looking to transact from pounds into euros.

The 2023-2024 FX regime is one where investors are pricing FX according to rate cut expectations, and 2024 has seen a retreat in Bank of England rate cut bets.

This is owing to a view that inflation could prove 'stickier' than was thought at the end of 2023, a view confirmed by Wednesday's inflation release.

The surprise rise in UK inflation to 4.0% year-on-year finally injected some volatility into a very dull Pound to Euro exchange rate, taking it to a high of 1.1673.

The UK OIS market - which is a money market which prices future interest rate moves - shows investors now expect the Bank of Englandd to start cutting rates in June compared to May prior to the CPI release.

"Investors took about 20bp out of the 2024 Bank of England easing cycle yesterday. That move supported sterling across the board," says Chris Turner, head of FX research at ING Bank.

But, pushback against rate cut bets is ubiquitous across G10 FX - including in the Eurozone where central bankers have poured cold water on Q1 rate hikes - and this limits Pound-Euro gains somewhat.

"President Christine Lagarde from Davos said that rate cuts could come in the summer rather than in the spring. Lagarde also underlined that the aggressive rate cuts currently priced in by the market are not helping in the ECB's fight against inflation," says Pia Fromlet, an economist at SEB.

Nevertheless, the 'hawkish' repricing regime has proven beneficial to the GBP; the last time we saw such 'hawkish' GBP exceptionalism was back in mid-2023.

This suggests we can aim for the highs reached around that time, which for GBP/EUR suggests 1.17.

Above: GBP/EUR at daily intervals showing the limits to the 2023-2024 FX regime range. Track GBP and EUR with your custom rate alerts. Set Up Here.

Note that this forms the top end of the range, and the air gets thin at such levels, raising the odds of failure.

We anticipate significant selling interest from a technical perspective, which could thwart upside.

Can GBP/EUR rally beyond here? It could, but we would like to see a sustained break of 1.1750 on a multi-day basis before considering this prospect.

For now, risk management considerations see anything above 1.17 as offering value from a tactical perspective.

The big downside risk for GBP/EUR is a significant recalibration of Bank of England rate cut bets.

We note that by April, inflation should be back at the Bank of England's 2.0% target.

Some economists say the UK could be the first to reach this target, which could rapidly inflate rate cut bets and undermine GBP.