Pound to Euro Rate Week Ahead Forecast: Focus Turns to Bank of England

January 27, 2024 - Written by John Cameron

STORY LINK Pound to Euro Rate Week Ahead Forecast: Focus Turns to Bank of England

The Pound to Euro exchange rate spiked higher after Thursday’s ECB policy meeting with a 5-month high of 1.1730 and held above 1.1700 on Friday to trade around 1.1715.

Expectations of a more dovish ECB policy sapped Euro support with the focus now moving to the Bank of England.

According to ING, EUR/GBP is closing in on major support at 0.8500 - but a break below it looks highly unlikely ahead of next Thursday’s Bank of England meeting.

In other words, it expects strong GBP/EUR resistance at 1.1765.

Divergence in economic expectations and central bank policy stances have been key to driving the Pound higher, especially with the Euro under wider pressure.

The UK GfK consumer confidence reading improved to -19 for January from -22 previously which was above consensus forecasts of -21 and the strongest reading for two years.

Joe Staton, client strategy director GfK, commented; “Importantly, the view on our personal financial situation for the coming year has gained two points and now stands at zero. This is exciting as it ends 24 consecutive months of negative scores for this measure and this significant change is the best single indicator for how the nation’s households feel about their income and expenditure.”

Staton considered that the decline in inflation has boosted confidence and added; “On balance, while there is national and global turmoil, the Consumer Confidence Index has started 2024 on a positive note – let’s see if this optimism continues.”

Linda Ellett, UK head of consumer, Retail and Leisure for KPMG, was still very cautious over the outlook; “Household spending power is still gradually being eroded and in this environment it is little surprise to see that there is limited appetite for spending dwindling savings on major purchases.”

T Rowe Price economist Tomasz Wieladek added; “Economic momentum in the UK is clearly improving.” However, the headwinds to consumer confidence could become more powerful in the future, especially if supply chain restrictions become greater and inflation stickier.”

According to Goldman Sachs; "The UK growth momentum continues to improve, driven by the persistent expansion in the services sector, which differentiates the UK from the rest of Europe."

Attention will focus on the February 1st BoE meeting with a particular focus on the vote split and forward guidance.

Kim Crawford, global rates portfolio manager at J.P. Morgan Asset Management expects that the BoE will be relatively cautious; "All else equal, even a modest lift to activity at this stage will likely delay the start of the BoE's shift away from its restrictive policy setting and slow the pace of cuts delivered."

In contrast, the German consumer confidence index dipped to a 10-month low of -29.7 for January from -25.4 previously.

The data reinforced concerns over the Euro-Zone outlook and reinforced speculation that the ECB would move to an earlier cut.

The bank held the main interest rate at 4.5% on Thursday, but there was only a limited push back against market expectations.

According to ING, the ECB will hold firm; “As long as actual inflation remains closer to 3% than 2%, the ECB will not look into possible rate cuts. It would require a severe recession or a sharp drop in longer-term inflation forecasts to clearly below 2% to see a rate cut in the coming months. We continue to believe that a first rate cut will not come before June.”

Charu Chanana, head of currency strategy at Saxo in Singapore considered the rhetoric was more dovish; “The ECB's pushback against market bets of an April rate cut was less direct and positive direction was noted on wages which pushed up expectations and emphasises a bearish outlook for the euro.”

According to Colin Finlayson, Fixed Income Investment Manager at Aegon Asset Management

"The ECB are guiding towards the summer at the earliest for any rate cuts to begin, but we feel that they may not have the luxury of waiting that long."

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TAGS: Pound Euro Forecasts