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The British Pound looks set to score a second consecutive weekly gain against the Euro, aided by a surprise rise in UK house prices, pushback against rate cut bets by Bank of England's Megan Greene, and a large undershoot in Eurozone inflation.

The Nationwide house price index revealed another monthly gain in November, rising by 0.2% month-on-month and defying expectations for a fall of -0.4%.

This whittles down the annual loss to -2.0% and suggests the house price collapse resulting from rising interest rates that many had feared is still some way off.

Nationwide reports new signs of strength in the housing market, suggesting the impact of previous Bank of England rate hikes might not be as severe as economists might have been expecting.

In fact, expectations for Bank of England rate cuts in 2024 appear to be behind the more upbeat tone reported by Nationwide: "There has been a significant change in market expectations for the future path of Bank Rate in recent months which, if sustained, could provide much-needed support for housing market activity," says Robert Gardner, Nationwide's Chief Economist.

The market has steadily 'priced in' rate cuts for 2024 during recent months, which in turn lowers the cost of finance in the real world, which is reflected in lower mortgage rates.

Therefore, the market is working against the Bank's goal of ensuring financial conditions are sufficiently restrictive enough to slow the economy and lower inflation.

Easing financial conditions have prompted a host of Bank of England rate-setters to say over recent days that UK interest rates must stay at 5.25% for an extended period and that the market might have to reconsider the number of cuts it still expects in 2024 (up to three hikes are still priced).

And the message appears to be getting through as rate cut expectations have retreated of late, supporting UK bond yields relative to those in the Eurozone and the U.S., which has, in turn, boosted the Pound.

Above: Rate cut bets have risen since August (downshift in the forward interest rate slope). Image courtesy of Nationwide.

The Pound to Euro exchange rate is up 0.90% this week at 1.1617 (EUR/GBP is down at 0.8606), adding to the previous week's 0.94% gain. The Pound is up a third of a per cent against the Dollar at $1.2636 as it looks to bank a third consecutive weekly gain.

"Expectation that ECB will cut rates before the Bank of England is weighing on EUR/GBP," says Robert Howard, an analyst at Reuters. "Markets see around 50% chance of ECB rate cut as early as March, MPC hawk Greene says BoE rates might need to stay high for an extended period."

The Bank of England's Megan Greene was the latest policy setter to warn interest rates won't come down anytime soon, saying on Thursday the balance of risks point to the Bank doing too little by way of fighting inflation than doing too much.

In a speech delivered in Leeds, Greene said, "one risk is that inflation is more persistent than expected... I continue to worry more about the risk of inflation persistence".

She follows the Bank of England's Bailey, Pill, Haskell and Ramsden in saying rates must stay high for an extended period, confirming a large coalition of Monetary Policy Committee members willing to strike a 'hawkish' tone at the Bank of England's December policy update.

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This can support Sterling into year-end.

At the same time, the Euro is under pressure after Eurozone inflation fell to 2.4% year-on-year in November from 2.09% in October, putting it a mere few points away from the ECB's 2.0% target.

For sure, base effects mean next month's reading will be higher, but the trajectory of prices in the Eurozone is clearly going the ECB's way.

"EUR/GBP declined yesterday on the back of lower than expected inflation data from the euro area," says Mohamad Al-Saraf, an analyst at Danske Bank.

Core CPI rose 3.6% y/y, but this was well below the 3.9% the market was expecting and sharply down on October's 4.2% reading.

"The euro came under considerable pressure after yesterday's November inflation data," says Ulrich Leuchtmann, an analyst at Commerzbank.

The market is now fully priced for a rate cut from the ECB by April of 2024 and Leuchtmann says there is little in the coming weeks that will challenge this view.

"The ECB will not meet until the week after next. Until then, however, there will only be a few statements from ECB officials. They will therefore hardly be able to tell us before then whether Europe's monetary watchdogs will assess the latest inflation trend in the same way as the market," he says.

The Pound-Euro exchange rate can hold around current levels if rate cut expectations for both the Eurozone and UK stabilise around current levels and gain if the market pares back expectations for UK cuts.

But it is becoming increasingly difficult to see how the market can bake more rate cuts into the ECB picture, suggesting some stability for the Euro ahead.