– Written by
Frank Davies
STORY LINK Pound-to-Euro Forecast: GBP Weaker Ahead of BoE, ECB
The Pound to Euro exchange rate (GBP/EUR) slid below 1.14 after UK inflation fell sharply in November, cementing expectations of a Bank of England rate cut this week.
The scale of the CPI miss has also increased confidence that easing could accelerate next year, undermining Sterling support.
Attention now turns to Thursday’s BoE and ECB decisions for confirmation.
GBP/EUR Forecasts: Below 1.1400
The Pound to Euro dipped sharply to 1.1375 from 1.1425 after the weaker than expected UK inflation data.
Markets see scope for a more decisive vote in favour of a Bank of England (BoE) rate cut on Thursday and see the possibility of sharper cuts next year which undermined Pound support.
Reaction to the BoE and ECB decisions will be crucial for the Pound on Thursday.
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The headline UK inflation rate dipped to 3.2% for November from 3.6% the previous month and notably below consensus forecasts of 3.5% while the core rate retreated to 3.2% compared with expectations of no change at 3.4%.
The goods inflation rate retreated to 2.1% from 2.6% while there was a slight decline in the services-sector rate to 4.4% from 4.5%.
The food inflation rate dipped sharply to 4.2% from 5.2% in October.
ONS chief economist Grant Fitzner commented; Inflation fell notably in November to its lowest annual rate since March. Lower food prices, which traditionally rise at this time of the year, were the main driver of the fall.”
According to ING; “Noise aside, this latest drop in inflation fits into a broader body of evidence suggesting that price pressures are cooling. We expect headline inflation to fall pretty close to 2% by May.”
Markets now see close to a 100% chance of a rate cut by the Bank of England on Thursday.
MUFG commented; “If there was any doubt about a rate cut at the BoE’s MPC meeting tomorrow then those doubts are surely gone now after this morning’s CPI data for November revealed a much weaker than expected set of data.”
The bank still has some reservations; “the concerns over ‘sticky’ underlying inflation pressures will still persist within the MPC. Indeed, our own estimate of the BoE’s underlying services measure actually picked up from 4.0% to 4.1%.”
Nevertheless, it considers that there could be a more decisive vote for a cut.
Looking at next year, markets are closer to pricing in three rate cuts compared with just over two ahead of the inflation data.
According to ING; “After a rate cut at Thursday’s meeting, we expect two further cuts in February and April 2026.”
The German IFO business confidence index retreated to 87.6 for December from 88.0 previously and below consensus forecasts of 88.2 with a small retreat in expectations.
Markets remain confident that the ECB will hold interest rates at 2.0% on Thursday, but the Euro has been supported by hawkish comments from council member Schnabel.
According to ING; “Should she be exposed as a hawkish outlier on Thursday and eurozone growth forecasts be revised insufficiently higher, then the euro could get hit.”
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TAGS: Pound Euro Forecasts
