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The ECB trimmed interest rates to 3% yesterday as the pound reacted to GDP figures.
The European Central Bank (ECB) trimmed interest rates from 3.25% to 3% on Thursday. Undeterred by this, the euro clawed back half a cent against the pound and escaped the kind of volatility that might have accompanied a larger rate cut.
Another major piece of news came with this morning’s announcement that the UK economy contracted by 0.1% in October.
A wobbly day for the pound saw it fall back against both the euro and the US dollar, which was itself given a leg up by sticky inflation in the manufacturing sector (more on that below). GBP/EUR is still just a whisker away from its highest level since Brexit.
The ECB’s decision came after it recently warned the eurozone economy would grow by just 1.1% next year. Given the European economy is facing several other threats — Donald Trump and the German election, to name but two – there was a widespread belief that the economy would benefit from less pressure on homeowners, businesses and investors.
ECB president Christine Lagarde referenced this shifting landscape in her press conference. “The element which has changed is the downside risks, particularly the downside risks to growth,” she opined.
The German trade surplus narrowed in October to €13.4bn.
November’s RICS house price balance for the UK showed a clear increase in house prices last month. Across the country, the difference between buyers seeing price increases and those seeing price increases widened to its largest margin since September 2022.
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GBP: Diverging fortunes
The Bank of England is not expected to match the ECB’s pace in cutting interest rates, which has contributed to GBP/EUR’s current success. As we have seen though, these narratives are frequently proven to be mere stories investors tell themselves. The current dynamic between the pound and the euro may not last until Christmas, let alone next year.
GBP/USD: the past year
EUR: Paving the way for cuts
With growth in the eurozone lethargic, the ECB has been one of the more aggressive central banks throughout 2024. In yesterday’s press conference, Lagarde noted that some policymakers had initially plumped for a larger 0.5% cut to interest rates. Although the vote was eventually unanimous, the outlook for the euro looks tough with the ECB expected to move faster than the Bank of England and the Federal Reserve.
GBP/EUR: the past year
USD: Chicken or the egg?
Producer Price Inflation (PPI) rose by 0.4% in the USA last month. That increase was driven by, of all things, a whopping 54.6% increase in the price of wholesale chicken eggs amid an outbreak of avian flu. In an odd way, the US dollar received a boost yesterday based on the value of domestic egg products.
EUR/USD: the past year
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