Home Daily Commentaries Europe all but set to reduce interest rates this June

Europe all but set to reduce interest rates this June

Conor Fleming
Written by
Conor Fleming

Conor Fleming

OFXpert

With 30 years of experience in the foreign exchange world, Conor spearheads initiatives to encourage businesses in Germany, Switzerland, and Austria to hedge their foreign currency risks with OFX.

| Friday 24 May, 2024

Daily Currency Update

The Euro advanced yesterday after the release of improved manufacturing index data in Europe. In Germany, the services purchasing managers index (PMI) also rose to 53.9, reaching an eleven-month peak. This increase was largely expected by economists, as recent data from the Eurozone has been stronger this year.

The Pound remains firm after UK PMI services data indicated further expansion in business activity. Additional support came from inflation data released this week, which showed that inflation is not decreasing as quickly as the Bank of England would like. This has led markets to speculate that interest rates might not drop as soon as expected.

In the US, Federal Reserve minutes revealed that many policymakers remain concerned about the slow progress in reducing inflation to the 2% target. Some members support additional rate hikes to ensure inflation returns to the target level.

Key Movers

Christine Lagarde, ECB President, stated yesterday that the council is "really confident" inflation is now under control. In doing so, the ECB is displaying a level of confidence that other central banks are currently unable to match. This sentiment is likely to keep the Euro under pressure until an expected reduction in borrowing costs in June.

Earlier this month, markets estimated a 50% chance of the Bank of England cutting rates in June. However, after this week’s inflation data, that probability has dropped to 14%. Additionally, expectations for the first rate cut have shifted from August to November. This is contributing to the Pound's recent underlying strength.

As the interest rate policy divergence between the US and Europe increases, we will likely see the currency pair remain range-bound. This is especially relevant as the ECB prepares for a rate cut in June. The Federal Reserve appears split in its opinions, with some members believing that inflation is on track and moving lower, while others see risks. Consequently, future decisions will be data-dependent.

Expected Ranges

  • GBP/USD: 1.2675 - 1.2725 ▲
  • GBP/EUR: 1.1710 - 1.1765 ▲
  • GBP/AUD: 1.9200 - 1.9260 ▲
  • EUR/USD: 1.0795 - 1.0850 ▼

Written by

Conor Fleming

OFXpert

With 30 years of experience in the foreign exchange world, Conor first embarked on his financial career journey as a trainee dealer in BNP Paribas in the early 90s. His professional journey also took him to New York, where he assumed the role of Head of Sales with an Irish bank for a few years. During his tenure at both banks, he was invited to several interviews on Irish television to discuss market turbulence, the factors driving volatility and insights into what could be expected as events unfolded.