Pound to Euro Forecast: Break Above 1.15 say ING Analysts

November 24, 2023 - Written by Frank Davies

STORY LINK Pound to Euro Forecast: Break Above 1.15 say ING Analysts

The pound-to-euro exchange rate (GBP/EUR) was able to make net headway on Thursday and settled just above the 1.1500 level on Friday.

The relative outlook for Euro-Zone and UK economies will remain a key element with a particular focus on Germany.

The overall data flow has indicated a slightly more positive UK position which will underpin the Pound.

The UK GfK consumer confidence index rebounded to -24 for November from -30 the previous month and above consensus forecasts of -28.

The data maintained the spell of erratic releases over the past few months.

Joe Staton, Client Strategy Director GfK, says: “Recent ups and downs in confidence have underlined the nation’s topsy-turvy economic mood as encouraging news about falling inflation and wage growth is offset by high personal taxation, alongside costly fuel and energy bills. Although the Overall Index Score is still tracking firmly in negative territory, it is good to see that consumers are more optimistic about their personal financial situation.”

He added; “Despite the acute cost-of-living pressures, many would still like to loosen their purse strings just a little so they can enjoy that feel-good factor we all associate with the festive season.”

Thursday’s PMI business confidence data suggested that the UK economy was still struggling to gain any traction, but potentially escape recession.

Simon Harvey, Head of FX Analysis at Monex Europe commented; "November’s flash PMIs once again support our view that the UK economy is merely in a state of stagnation as opposed to outright contraction."

He added; "In conjunction with structural supply issues which should keep short-term UK rates higher for longer relative to the euro zone, we expect the UK’s better relative growth prospects to support renewed upside in sterling-euro".

Bank of England rhetoric will remain a significant element for market expectations.

In comments to the Financial Times on Friday, chief economist Pill stated that monetary policy was in a difficult phase amid stubbornly high price pressures.

He added that it was important to resist the temptation to declare victory and that key indicators such as services-sector inflation and pay growth remain at very elevated levels.

Following the BoE rhetoric this week, markets are less confident that the bank will engage in substantial interest rate cuts next year.

ING noted that markets have priced out around 20bp of cuts in the September 2024 contract in the past week.

The German IFO index edged higher to 87.3 for November from 86.9 previously, but slightly below consensus forecasts of 87.5.

The current conditions component advanced marginally to 89.4 with while the expectations index also edged higher to 85.2 from 84.8, but both were slightly below market expectations.

The IFO commented; “The German economy is stabilizing, albeit at a low level.”

According to ING; “It's better than another drop but the latest improvement in the Ifo index is too insignificant to really celebrate. It points to a bottoming out of the German economy, rather than an imminent rebound.”

ING added; “The notion that recessionary pessimism may have peaked in the eurozone is a positive for EUR/USD, but whether this can offer support to the pair already in the near term is a different question.”

MUFG points out relative under-performance; “The PMI data in Germany and in the euro-zone did improve but the improvements were pretty modest underlining the still weak with the euro-zone readings for manufacturing and services well below UK levels and still in contraction territory.”

MUFG added; A signal of the changing balance of macro risks was underlined by the release of the ECB minutes which look to us to indicate a stronger prospect of rate cuts possibly coming sooner than expected.

It expects these expectations will stifle Euro demand.

ING concluded; “We expect GBP to keep its decent momentum, especially in EUR/GBP, which we expect to make a decisive break below 0.8700 in the coming days. (GBP/EUR solid break above 1.1500).”

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TAGS: Pound Euro Forecasts