Pound to Euro Long-Term Forecast: Slide to 1.0525 End-2025 say Unicredit

November 26, 2023 - Written by David Woodsmith

STORY LINK Pound to Euro Long-Term Forecast: Slide to 1.0525 End-2025 say Unicredit

Foreign exchange strategists at ING Bank expect the Pound to Euro exchange rate (GBPEUR) to make a decisive break above 1.1500 in the short term.

As a reference, today's GBP/EUR is 1.15196.

From a longer-term perspective, Unicredit expects a retreat to 1.1365 at the end of 2024 and further sharp losses to 1.0525 at the end of 2025.

The UK GfK consumer confidence index rebounded to -24 for November from -30 the previous month and above consensus forecasts of –28 which increased hopes of firmer consumer spending in the crucial Christmas period.

The UK PMI manufacturing index improved to 46.7 for November from 44.8 previously and above consensus forecasts of 45.0.

The services-sector index also increased to 50.5 from 49.5 which was above expectations of 49.5. This was the first return to expansion territory for the first time in four months.

According to the survey, the overall rate of output charge inflation was the strongest for four months, largely due to a robust and accelerated increase in the service economy.

Bank of England (BoE) rhetoric has been broadly hawkish over the week.

In comments on Monday, Governor Bailey stated that it was much too early to be thinking about interest rate cuts and borrowing costs might need to increase again if there were signs that inflation was more persistent than expected.

In testimony to the Treasury Select Committee, Bailey also considered that risks to inflation and interest rates were still to the upside, especially given the tight labour market.

MPC member Mann pointed to survey evidence which suggested that pricing pressure will remain strong in 2024.

She continued to back further rate hikes.

The overall rhetoric from the committee was broadly hawkish and survey evidence suggesting firm price increases within the services sector will reinforce these reservations.

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 latest data confirmed that the German economy contracted 0.1% in the third quarter of 2023.

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 expects net Pound gains; “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.”

Credit Agricole remains cautious on the Pound; “we believe that the MPC members will continue to push back against the market rate cut expectations. That being said, it would take positive economic data surprises out of the UK to see an extension of the recent period of GBP consolidation.”

According to Unicredit; “We expect sterling to weaken, reflecting the bleak outlook for the UK economy and the BoE easing, but more in 2025 than next year.”

Oil prices will be a significant element in determining the relative performance. The Euro will tend to gain slightly more in relative terms.

Crude oil edged lower on Friday, but remained above 4-month lows posted last week.

According to CMC Markets analyst Tina Teng; “Recent Chinese data and fresh aid to the indebted property sector can be "positive for the oil market's near-term trend."

There are still concerns surrounding inventory levels.

According to ANZ; "Fundamentals developments have been bearish with rising U.S. oil inventories."

Investment banks overall are slightly more optimistic over the Pound.

According to Socgen;”there’s a chance the UK will grow faster (less slowly) than Germany next year. That just gives the UK MPC a little more cause to delay any rate cuts and keeps the gap with Europe open.”

It sees 0.8675 in EUR/GBP as a key support area (1.1525 resistance for GBP/EUR).

It adds; “In case the pair fails to defend 0.8675, there could be risk of a deeper down move towards the low formed earlier this month near 0.8650 and 0.8610. (1.1560 and 1.1615 respectively for GBP/EUR.)

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TAGS: Currency Predictions Pound Euro Forecasts