GBP/EUR Hits Year-to-date Low
- Written by: Gary Howes
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Pound to euro exchange rate falls to 1.1435, the lowest level of the year, after a soft set of labour market data that bolstered bets the Bank of England will raise interest rates in March.
UK payrolls fell 11k in January and the unemployment rate rose to 5.2% in December, with only the 5.3% pandemic peak standing in the way of a decade high.
UK bonds were bought as investors read the data as a harbinger of lower inflation levels.
The pound fell across the board as investors moved to fully price a March cut at the Bank of England, and has raised the odds of a further two cuts over the duration of the year.
"For the Bank of England, today’s data will only add to market expectations that more rate cuts are coming. We stick to our basecase for two more rate cuts this year (and likely by summer). Talk of risk management considerations will only rise from here," says Sanjay Raja, an economist at Deutsche Bank.
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As UK bonds - or gilts - rise in value, their yield falls, which makes them less attractive to international investors. The currency market adjust sterling lower in anticipation of lower demand for UK gilts.
"UK gilts outperform global peers with yields pushing between 1.2 and 3.5 bps lower, accompanied by GBP weakness. EUR/GBP reaches for the YtD high just south of 0.875, up from a sub 0.87 reading in early European hours," says a note from KBC Bank.
The fall to 1.1435 takes the exchange rate close to a horizontal graphical support line that has arrested similar probes twice already this year and on December 31.
In 2025 this particular level provided support on a number of occasions and its eventual break opened the door to levels closer to 1.13.
Therefore, those wanting a stronger pound will hope the support credentials that this area has been known to offer come into play again and turn the ship around.
However, if Wednesday's inflation print comes in softer than expected, a break below here shifts the market into a lower range. "CPI data as expected tomorrow will reinforce our view of a March rate cut and keep the pound under downward pressure," says Derek Halpenny, Head of Research for Global Markets EMEA at MUFG Bank.
Those with EUR purchase requirements then risk lower values towards November lows at 1.13.
