The latest Euro-Zone wages data triggered fresh doubts whether an April ECB interest rate cut was realistic and GBP/EUR lost ground.
GBP/EUR is close to a significant support area just below 1.1670 and a break lower would push the pair to 4-week lows.
The latest wages data recorded a slowdown in Euro area negotiated wage increases to 4.5% for the fourth quarter of 2023 from 4.7% previously.
ING noted the importance of wage trends; “The latest ECB meeting put wage growth even more at the center of the policy discussion, pointing to how rate cuts are to be ruled out unless negotiated salaries move convincingly in the right direction.
It added; “A sharp downturn, however, would be necessary to give the ECB a reason to frontload rate cuts – and this is not something other activity data is showing.”
According to the bank; “Markets currently price in a 45% probability of an ECB rate cut by April, which seems too ambitious in our view.
Commerzbank added; “the figures would probably have to be quite low for the Euro to fall more sharply. After all, the large number of wage indicators points to a stabilization of wages rather than a sustained trend reversal.”
According to Goldman Sachs; “we expect the activity data to primarily validate that policy easing can begin as soon as policymakers are more comfortable with the inflation trend.”
Bank of England (BoE) rhetoric has remained mixed with some hints of a slightly more dovish stance.
The MPC member Dhingra again warned over significant downside risks to the economy while Broadbent suggested a rate cut was realistic this year. Governor Bailey also stated that it is not unreasonable to expect rates cuts this year.
Markets, however, are not confident that the bank will relent quickly.
Goldman Sachs has changed its forecast for the first rate cut to June from May previously and market pricing for a May cut has dipped below 20%.
According to NatWest; “one of the key dovish arguments for expecting earlier rate cuts was that Bailey would crumble to political and public pressure for lower rates, with headlines of a recession and spot inflation ~2% in the near-term.
It added; “We’re less convinced that this would be a driver of policy, especially with markets pricing in some degree of easing.”
Despite the limited recent setback, Bank of America has a positive outlook on the Pound; “With the domestic economy continuing to improve, the pessimistic read on UK growth is harder to reconcile. We find ourselves on the optimistic side of the consensus.
BoA has raised its end-2024 GBP/EUR forecast sharply to 1.1905 from 1.1365 previously.
BoA added; “much of the GBP appreciation is front-loaded this year as policy divergence dominates sentiment. The pace of appreciation slows into 2025 as GBP approaches fair value and as structural headwinds exert themselves on the UK economy.”
The end-2025 GBP/EUR forecast has been raised to 1.1765 from 1.1625 previously. UK government borrowing data will be released on Wednesday. Lloyds Bank notes that the January data is very important as it is a key month for tax receipts. According to Lloyds; “so it will be an important indication of what room the Chancellor has for tax reductions.”
COT data released by the CFTC recorded a further increase in long, non-commercial Pound positions to 50,500 contracts from 34,500 previously.
This was the largest long Sterling position since the end of August in 2023. In contrast, the number of long Euro positions declined to just below 53,000 from 62,000 the previous week. This was the smallest long position since October 2022.
The overall shift in positioning will lessen the scope for further Euro long liquidation and tend to limit scope for Pound buying.