Pound to Euro Rate Looks to ECB After Budget Provides Sterling With A Solid Footing

Above: File image of ECB President Lagarde. Her press conference will be a near-term 'wild card' for FX markets.

The Pound to Euro exchange rate now turns to the European Central Bank (ECB) for cues after the Spring Budget confirmed a return to fiscal orthodoxy in the UK.

Pound Sterling was relatively stable through the Spring Budget announced midweek, a disappointment to some looking for a stronger currency but a relief to those who remember the collapse that followed the Liz Truss budget.

Truss's legacy is that unfunded stimulus can prove incredibly costly and her successors are likely to maintain UK fiscal credibility, which can provide a platform for further longer-term advances in the Pound.

The budget will provide a stimulus to the economy; for the 2024-25 financial year there is a net fiscal policy loosening of £13.9BN, 0.5% of GDP. The Office for Budget Responsibility raised UK growth forecasts and predicted real improvements in disposable incomes, both of which were positive for the Pound's outlook.

But for the Pound, none of the developments announced by the government will have a material impact on the Bank of England. In the near term, Pound-Euro remains locked in a tight range, albeit with a slightly bearish momentum that could bring a test of support at 1.1658 into play before long:

Above: GBP/EUR looks to be edging towards the bottom of the range. For now, support is likely to hold. Track GBP with your own custom rate alerts. Set Up Here. 

The low volatility in Pound-Euro is symptomatic of expectations that the European Central Bank and Bank of England will move in lockstep when cutting interest rates: both are expected to commence cutting around June, with approximately three further cuts anticipated into year-end.

This lockstep move matters for markets as it suggests little divergence in UK and Eurozone bond yields, which are the ultimate arbiters of the exchange rate.

With this in mind, today's ECB event will offer the prospect of some volatility in Euro exchange rates. No change to rates is expected, but the market will be keenly attentive for any indication as to when rates might be cut.

The ECB will maintain guidance that although inflation trends have improved, it remains attentive to any upside surprises and, therefore, caution must be exercised before cutting interest rates.

"It is clear that the next step will be downwards - after all, in addition to the doves who are in the majority in the Council, the hawks are now also talking about interest rate cuts, too, and inflation is heading in the right direction. It is also clear that the first rate cut is not imminent," says Antje Praefcke, FX Analyst at Commerzbank.

In short, all signals the central bank presents will likely point markets to a June cut.

That said, President Lagarde's press conference can often cause some excitement, given how any slip-ups in communication can have ramifications.

This could allow buyers and sellers of euros to transact at advantageous rates.

That said, look for any significant movement to be faded as the range in the above chart continues to be respected.

"In short, unless something unexpected comes from the ECB today, I see at most a moderate reaction of the euro to statements that more or less clearly bring a first rate cut into play," says Praefcke.