Euro Update – 15 October 2024

GBP
Two weeks into October and currency markets are warming up, despite the cooler autumnal weather. Volatility has been incredibly high, largely driven by conflict in the Middle East. As traders took the common run to safety, USD strengthened, while GBP has dropped by more than 2% against it.
Sterling weakness was further compounded by comments from Andrew Bailey, the Governor of the Bank of England, who cast doubt on the BoE’s stance ahead of their next policy meeting on 7 November. Bailey suggested that bank cuts could become “more aggressive” than expected, diluting some of the Pound’s strength against the USD and the Euro as its higher yield against both currencies looks like it might be short-lived.
Andrew Bailey’s stance was refuted by Huw Pill, Chief Economist and MPC member, who said that interest rate cuts in the UK should be “gradual”, and that while inflation levels are expected to rise to 2.5% around Christmas, they will likely move back towards the target 2% in early 2025. It is worth noting that the Bank of England has not cut interest rates at consecutive meetings since 2020.
August GDP data was released today, meeting expectations of a 0.2% reading and showing a slight uptick on the previously stagnant release. This could signal some further capacity in the UK economy for monetary easing from the Bank of England.
Also released today were the UK’s Manufacturing and Industrial production figures, which both came in over forecast and showed some positive movement in the UK economy. Industrial production came in at 0.5%, ahead of the 0.2% expected by markets, and Manufacturing production reported a 1.1% increase, ahead of the 0.3% forecast. These positive indicators could contribute to bolstering the Pound’s standing.
EUR
September saw the Eurozone inflation rate drop below the ECB’s 2% target range to 1.8%. Core inflation, which excludes the cost of food and energy, fell to its lowest level since February 2022. These figures have raised expectations of an October ECB rate cut.
The ECB has already cut rates from record highs twice this year, and markets now expect even quicker policy easing with moves in October and December fully priced in as inflationary pressures are easing faster than policymakers had expected.
According to Eurostat, retail sales in the eurozone saw a modest recovery in August, when trade volumes rose by 0.2% compared with July. At the same time, the European Union saw a 0.3% increase. Although the figures were in line with economists’ expectations, the annual reading for the eurozone fell short of the anticipated 1% rise, reflecting some softness about consumer spending dynamics across the currency bloc.
None of the information contained in this document constitutes, nor should be construed as, financial advice.