Pound to Euro Forecast 2024-2025: Consensus at 1.1520

January 8, 2024 - Written by John Cameron

STORY LINK Pound to Euro Forecast 2024-2025: Consensus at 1.1520

Rabobank forecasts that the Pound to Euro (GBP/EUR) exchange rate will strengthen to 1.1905 at the end of 2024.

In contrast, ING expects that GBP/EUR will slide to 1.1110 on a 12-month view.

The consensus forecast in the latest Reuters poll was for GBP/EUR to trade slightly weaker at 1.1520 by the end of 2024.

According to Rabobank, the consensus is more bearish on the Pound with GBP/EUR forecast to decline to 1.1365.

GBP/EUR posted significant gains to 1.1620 during the week from 1.1535 at the end of 2023.

The UK data releases in the first week of January posted a generally more optimistic picture over the economic outlook which supported the Pound.

There was a significant upward revision to the services PMI index and the construction index recorded a slower rate of contraction.

The all-sector PMI, combining the construction data with services and manufacturing figures, increased to 51.7 in December from 50.2 in November, the highest reading since June.

Elsewhere, mortgage approvals increased to a 5-month high just above 50,000 for November.

Halifax also reported a 1.1% increase in house prices for December after a 0.6% increase in November with an annual increase of 1.7%, the first positive figure since April 2023.

Following the data, traders cut back expectations of Bank of England (BoE) rate cuts this year. Markets now see around 120 basis points (bps) of cuts in 2024, compared to 140 bps expected on Thursday which helped underpin the Pound.

According to Credit Agricole; “In our view, EUR/GBP could still revisit last year’s lows of around 0.85 (1.1765for GBP/EUR) in the months to come, as the UK economy may in the end hold up somewhat better than feared. On that matter, last month’s UK flash PMI readings possibly offered some encouraging signs as especially the services index rose by a greater extent than expected to a six-month high of 52.7.

It added that the divergence between the UK and Euro-Zone indices has widened to the largest extent since the first quarter of 2022.

Credit Agricole added; “Meanwhile, the absence of warning bells in the latest BoE credit figures could also help, and in particular if UK households still did not have to dig further into their deposits or to ramp up into excessive borrowing in November when dealing with a lingering cost-of-living crisis.”

According to RBC Capital Markets; “with quoted mortgage rates now falling and media reports of lenders engaging in a New Year ‘mortgage rat es war’ mortgage approvals should begin to stage a more meaningful upturn in the early months of 2024.”

The Euro-Zone economy in general and Germany in particular will also be a key element for GBP/EUR.

The Euro-Zone PMI services-sector index was revised higher to 48.8 from the flash reading of 48.1.

According to JP Morgan; “Overall, this is an encouraging release although the PMI will need to rise further to validate our modest growth forecast and the ECB’s more upbeat view.”

Nordea looks at the potential for ECB rate cuts; “The ECB appears reluctant to cut rates in the near future, and given such a stance we continue to expect the first cut to take place in June. However, if inflation prints continue to come in on the soft side, risks of an earlier cut and/or a faster pace of cuts compared to our current baseline of quarterly 25bp rate cuts increase.”

According to MUFG; “EUR followed a familiar pattern by rallying strongly into the end of last year. That could well reverse in the first quarter of this year given the weak economic backdrop in the euro-zone and weak global growth.”

Rabobank looks at the historical context; There is some evidence that forecasters’ pessimism over the outlook for GBP has become ingrained. At the start of each year following the 2016 Brexit referendum, the Bloomberg survey consensus has expected GBP either to lose value or (more commonly) hold steady vs. the EUR on a 12-month view.

It added; “There has been plenty of justification for a lack of optimism with respect to both the pound and the UK economy in this period. Investment has been weak and, excluding the past year or so, UK politics have been volatile.”

Rabobank sees only limited scope for a UK reassessment, but expects Euro-Zone weakness will be pivotal; “While it is still difficult to paint a glaringly optimistic picture for the outlook for GBP, we see potential for EUR/GBP to tick lower to 0.84 on a 12-month view, in part due to the poor position of the German economy.”

ING commented; “We are bullish on EUR/GBP this year, with an end of the first quarter target of 0.88.(1.1365 for GBP/EUR).

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TAGS: Pound Euro Forecasts