Pound Sterling Poised for Further Gains Against the Euro
GBP appears set to extend its recovery against the Euro in a week shaped by the European Central Bank (ECB) interest rate decision and Germany’s inflation data.
As markets anticipate Thursday’s expected ECB interest rate cut, the Pound to Euro exchange rate (GBPEUR) has climbed to 1.19—a two-week high—breaking above the 200-day exponential moving average (EMA).
Should GBPEUR sustain multiple daily closes above the 200 EMA, it would signal the end of a brief downtrend, paving the way for a potential return to levels of 1.20 and higher in the weeks ahead.
The GBP/EUR pair is now trading above the nine-day EMA, with the Relative Strength Index (RSI) pointing higher, signalling positive short-term momentum for the coming hours and the next two to three days.
A test of 1.1950 is anticipated ahead of Thursday’s European Central Bank (ECB) decision and Friday’s German CPI inflation release—two key events in an otherwise quiet week for UK data. The ECB is expected to cut interest rates by 25 basis points while maintaining guidance similar to previous meetings. This guidance will emphasize data-driven rate decisions without committing to a preset path for further cuts.
Lower rates are aimed at stimulating growth in the Eurozone, though inflation remains stubbornly above the ECB’s 2.0% target. Last week’s unexpectedly strong PMI data offers a glimmer of optimism, suggesting the Eurozone economy may have bottomed out. This could lead the ECB to adopt a cautiously optimistic tone, pushing back against calls to accelerate rate cuts and offering a temporary boost to the euro.
However, the ECB is unlikely to make sufficiently "hawkish" statements to sustain a meaningful rally for the euro, and traders may consider fading any GBP/EUR dips following the announcement.
Friday’s German CPI inflation data is expected to show a flat monthly rate of 0% for January, down from 0.5% in December. This would confirm that inflation is under control in the Eurozone’s largest economy, reinforcing the case for lower interest rates and countering any hawkish interpretations from the ECB’s earlier comments.
Will History Repeat? Examining the US Dollar Under Trump’s Presidency
Reflecting on Donald Trump’s first presidential term, the US dollar weakened in 2017 following a strong rally in 2016. As Trump begins his second term, early signals suggest a potential repeat of history. Last week, the Greenback suffered its worst performance in five months, weighed down by selling pressure after Trump expressed a preference for avoiding tariffs on China and urged the Federal Reserve to cut interest rates.
While interest rate differentials typically support the dollar, market sentiment and short squeezes could counteract this effect. Hedge funds and large speculators currently hold their most significant long-dollar positions since 2019. Furthermore, the dollar appears historically overvalued, having returned to 1985 levels when adjusted for inflation differentials. Trump might leverage this by pressuring trading partners to strengthen their currencies, possibly using tariffs as a bargaining tool. However, the US economy remains robust, as underscored by Friday’s strong PMI data showing the manufacturing sector’s first expansion since July 2024.
The week ahead will be pivotal, from the US driven by key themes such as inflation, trade politics, and central bank decisions. Wednesday’s FOMC decision will set the tone for currency markets, followed by Friday’s PCE data, which is expected to show an acceleration in December’s inflation rate (m/m).
Can Europe’s Economy Defy Investor Pessimism?
Investor sentiment toward the European economy has been predominantly negative, driven by fears of recession, sluggish growth, and geopolitical tensions. However, much of this pessimism is already priced into the market, creating a low bar for positive surprises. This means any unexpected improvement in economic data could spark a strong market reaction in the coming year.
Recent economic data supports this outlook. The Eurozone composite PMI rose from 49.6 to 50.2, surpassing expectations, while the UK’s PMI climbed to 50.9 against a forecast of 50.1, marking two years of consistent monthly private-sector growth. These indicators suggest that Europe’s economic momentum may have bottomed out.
The euro has gained support from recent positive developments, including a softening in Trump’s tariff rhetoric and the expansion of Eurozone private-sector activity. These factors have helped reduce the risk premium embedded in the euro, diminishing expectations for EUR/USD to reach parity.
Nevertheless, uncertainty over Trump’s trade policies toward the EU could cap further gains. Structural challenges, such as slowing growth and shifting monetary policies, may also weigh on the euro in the weeks ahead. The $1.02 level is expected to provide strong support, while the European Central Bank is anticipated to cut rates in the coming week, with at least three additional cuts likely by year-end.
