Sterling back above 1.17 against the euro – where will rates go next?

Pound Sterling recovered against the euro yesterday afternoon and climbed back above the key 1.17 threshold. This was preceded by a poor reading of retail sales data from the Eurozone which did not support the value of the single currency.

Eurozone retail sales are down 0.8% on a monthly basis and 1.1% on a yearly basis vs expectation of 0.9% and 1% respectively. A struggling retail sector could support the premise for an interest rate cut sooner rather than later. The European Central Bank will be digesting the data and monitoring the next round of inflation data closely. German data is released on Friday morning and can have a big impact on the wider Eurozone economy given the size of Germany.

If inflation continues to drop and the jobs and retail sector struggles the ECB will have to act on interest rates to avoid a recession. Current expectations are for interest rates to be cut by 125 basis points this year. That would bring Eurozone interest rates down from 4.5% to 3.25%. Compare this with the UK expectations of 5.25% to 4.5% and you can see why the pound is currently holding its ground against the euro.

However, higher for longer interest rates could begin to have a negative affect on the UK economy which narrowly avoided a recession this quarter.

Central Bank Speakers

Exchange rates fluctuations could be driven by commentary towards the end of this week with several central bankers set to speak. Member of the BoE Catherine Mann is speaking tomorrow, and she voted for an interest rate hike at the last meeting. Philip Lane, chief economist for the ECB will speak shortly afterwards and financial markets will be looking to digest what both have to say regarding future policy.

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