Pound to Euro: Danske Bank Forecasts Sterling at 1.1235 in 12 Months

December 24, 2023 - Written by John Cameron

STORY LINK Pound to Euro: Danske Bank Forecasts Sterling at 1.1235 in 12 Months

Foreign exchange analysts at Danske Bank expect that the Pound to Euro exchange rate will weaken to 1.1235 on a 12-month view.

HSBC expects the Pound will be able to hold its ground and forecasts an end-2024 rate of 1.1630.

Exchange Rates UK Research brings you the latest institutional forecasts (Danske Bank, HSBC, MUFG, Nordea, Soc Gen) and the GBP/EUR news for the week.

GBP/EUR retreated sharply to December lows just above 1.1510 during the week before consolidating around 1.1535.

The latest UK inflation report was the most important economic release during the week with weaker-than-expected data triggering a frenzy of speculation over an early pivot by the Bank of England (BoE).

The headline inflation rate declined more sharply than expected to 3.9% for November from 4.6% previously and significantly below consensus forecasts of 4.4%.

The core rate also declined to 5.1% from 5.7% and below expectations of 5.5%.

Retail sales data was stronger than expected, but GDP was revised down for the second and third quarters, increasing the risk of a technical recession.

In response, money markets moved to price in interest rate cuts more aggressively with the first move now seen in May.

Danske Bank considers market expectations are excessive, but still expects the Pound will lose ground; “We expect the BoE to deliver the first 25bp cut in June next year and a total of 75bp for the entire year. Markets are currently pricing 115bp for the year and the first full 25bp cut by June 2024. On balance, we continue to see relative rates as a moderate positive for EUR/GBP.”

Danske added; “Overall, we expect the UK economy to perform relatively worse than the euro area and expect relative growth outlooks and central bank pricing to weigh on GBP.”

HSBC commented; “In December, the BoE reiterated that it wanted to keep Bank Rate “sufficiently restrictive for sufficiently long” to return inflation to target: we now think the first cut will come in Q3 24.”

The bank is sceptical that the bank will hold out for that long, but growth developments could be pivotal.

HSBC added; “as the perkier PMIs might indicate, we think there are reasons to expect a gradual rise in UK growth. After all, the cost of living squeeze is part its worst, with real household incomes now rising, while the dovish shift in market rate expectations has eased borrowing cost pressures.”

The bank has raised its 2024 GDP growth forecast to 0.7% from 0.5% and the 2025 GDP growth to 1.0% from 0.9%. It added; “Hardly spectacular”, but a gradual acceleration.”

Danske also notes the importance of global growth conditions; “The risks that could see EUR/GBP trade substantially below our projection is if the UK economy considerably outperforms the euro area and/or inflation sustainably returning to target coupled with an acceleration in global growth.”

ECB policies will also inevitably be important for GBP/EUR.

MUFG doubts that the ECB can maintain a hawkish policy stance; “Further evidence that core inflation is falling more quickly alongside ongoing economic stagnation/recession risks in the euro-zone could force the ECB to abandon their commitment to keep rates at restrictive levels, and start moving back towards more neutral levels closer to around 1.50-2.00%.”

Nordea expects that the ECB will not bend in the short term.

It added; “The ECB will only have the December inflation print when meeting on 25 January for the next Governing Council meeting. We believe that means March is the earliest meeting to open the door for rate cuts, most likely in April or June.”

Nordea also pointed to global conditions; “Financial markets are currently pricing in a notably faster fall in ECB rates than we currently have in our baseline, and also an earlier starting point. A total of around 150bp of cuts are in prices by the end of next year compared to our baseline of 75bp.”

It also notes that there will be substantial bond issuance during 2024 which should put upside pressure on especially longer bond yields.

Higher yields would tend to underpin the Euro in global markets.

SocGen expects the Pound will lose ground during the year; “Our forecast for 2024 looks for a gradual climb to 0.90, as the gap between UK MPC and ECB rates narrows and the UK economy marginally underperforms the Eurozone.”

The bank added; “It’s not a thrilling prospect (a bearish consensus view of the UK means it would be more fun looking for positives in the outlook for Sterling).”

Given the consensus forecast of Pound vulnerability, there will be scope for Pound gains if the UK performance is stronger than expected.

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TAGS: Pound Euro Forecasts