Pound-to-Euro Exchange Rate Eyes Three-Year High Amid Interest Rate Dynamics
The Pound-to-Euro exchange rate is on track to reach a fresh three-year high in the coming months, supported by elevated UK interest rates. However, the pace of this ascent may be gradual as investor bets on further rate cuts in the Eurozone cool.
Overnight indexed swaps, which reflect market expectations for central bank interest rates, now indicate just two more rate cuts from the Bank of England in 2024—down from four anticipated just weeks ago. This repricing has strengthened the Pound, pushing GBP/EUR from January lows of 1.18 to 1.2090 by midweek.
Recent UK economic data has reinforced the Bank of England’s cautious stance, with inflation unexpectedly rising to 3.0%, surpassing forecasts of 2.8%. The central bank had previously signalled a preference for cutting rates quarterly, but money markets now suggest that pace may be too aggressive given persistent inflationary pressures. Some economists even predict UK inflation could reach 4.0%, driven by rising fuel prices, goods costs, and the government's upcoming tax and minimum wage hikes.
Whether GBP/EUR can push further toward 1.22 will also depend on the European Central Bank’s (ECB) rate decisions. If the ECB slows or pauses its rate-cutting cycle, the narrowing interest rate differential between the UK and Eurozone could limit the Pound’s upside. ECB board member Isabel Schnabel recently suggested the central bank might hold off on further cuts, raising uncertainty over the Euro’s trajectory.
The ECB has already lowered rates five times since June in response to sluggish Eurozone growth, but renewed inflation concerns and geopolitical risks, such as trade tensions, could alter its course. Currently, the ECB’s key rate stands at 2.75%, down from 4% in September 2023, with markets pricing in at least two more cuts this year. However, if expectations for a third cut diminish, Euro rates could adjust more hawkishly than UK rates, potentially slowing GBP/EUR gains.
Euro in Trump’s Grip as US Policy Shift Reshapes European Outlook
The euro remains heavily influenced by US President Donald Trump, whose daily remarks continue to drive sentiment and movement in the common currency. Trump has reportedly pressured Ukrainian President Zelenskiy to make peace with Russia swiftly or risk losing US support entirely. By sidelining Kyiv and Brussels in negotiations, the US is signaling a significant shift in diplomacy, leaving Europe’s geopolitical future uncertain.
This development overshadowed hawkish remarks from ECB Board Member Isabel Schnabel, who urged caution on rate cuts amid growing inflation concerns and tariff threats. German bond yields responded, with the 10-year Bund climbing to a three-week high of 2.55%.
Today's market focus will turn to three scheduled Federal Reserve speakers, US jobless claims, the Philly Fed Index, and European consumer confidence data. For EUR/USD to attempt a retest of $1.05 this week, it will need to maintain support above $1.04.
