EUR/GBP: Pound firms up as BOE rate hike odds grow

• German Institutes see 2025 GDP at 1.5%
• Germany GfK consumer confidence hit lowest since Apr 2023
• Euro Zone M3 money supply posts worst drop on record

FX traders appear convinced that the ECB is done hiking and that the BOE might have to stay hawkish a little while longer.  Rate hike odds for the BOE at the November 2nd meeting have edged higher to 40.6%, while the implied rate is seen peaking at 5.398% in March.  The ECB is likely done hiking but rate cuts probably won’t be happening until next summer.  Economists still see almost a one-in-five chance that the ECB could raise rates but an economic slowdown will likely help keep bringing inflation down.

Germany, the eurozone’s largest economy isn’t providing any providing any reasons to become optimistic.  German consumer confidence fell from a downwardly revised -25.6 to -26.5, which was below the 26.0 consensus estimate.  GFK reported that there is no recovery in sight for this year.  The news was not all bad as economic expectations are also stabilizing.  A slight recession is starting to get widely priced in for the German economy.  Both the ifo Institute for Economic Research (ifo) and the German Institute for Economic Research (DIW) have forecasted modest contractions.

The outlook for the UK economy is taking a turn for the worse as surging global bond yields will undoubtedly lead to more financial stress.  Stubborn inflation and labor shortages might keep the BOE in hiking mode and that could provide some short-term strength for the British pound.  The UK recovery will struggle next year as inflation will prove to be sticky and interest rates will remain elevated.

EUR/GBP 30-minute chart

The EUR/GBP shows that short-term bearishness appears to be in place and could have a clear path towards the 0.8640 region.  The headlines haven’t supported a strong outperformance by either side of euro-sterling, but the potential widening interest rate differential could keep the British pound supported here.

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