Pound to Euro Exchange Rate 2024 Forecast Ranges: 1.1480 or 1.19?

January 28, 2024 - Written by John Cameron

STORY LINK Pound to Euro Exchange Rate 2024 Forecast Ranges: 1.1480 or 1.19?

Foreign exchange strategists at HSBC expect the Pound to Euro exchange rate to weaken to 1.1480.

In contrast, Nordea expects GBP/EUR to strengthen to 1.19 at the end of 2024.

GBP/EUR secured a significant net gain for the week with 5-month highs at 1.1735 before consolidation around 1.1715.

The overall data flows bolstered expectations that the ECB would cut interest rates ahead of the Bank of England which supported the Pound. Attention will now focus on the February 1st BoE decision and guidance.

HSBC believes that the Pound is trading stronger than is justified by interest rate differentials and that there will be a dovish February BoE call.

According to HSBC; “The updated inflation forecasts should see a downward revision of around 1ppt to the 2024 inflation projection, with less of an upside skew. The big drop in December retail sales raises the risk of the UK having finished 2023 in recession, while downside surprises on wages could also remove the hawkish bias of some MPC members.”

It added; “We are expecting a much more dovish vote split. The three votes to hike in December will likely shift to holds, while there could be a vote for a cut.”

If HSBC’s expectations of a cautious risk tone are justified, this would also tend to underpin the Pound.

The UK data for the week was, however, broadly encouraging. Although still in contraction, there was a tentative recovery in the UK PMI manufacturing index to a 9-month high while the services sector posted stronger growth and an 8-month high.

There was lower than expected government borrowing data for December, fuelling talk of more significant tax cuts and the latest GfK consumer confidence index recovered further to a 2-year high.

ING sees only limited scope for further Pound gains; “The EUR/GBP pair has lots of support in the 0.8500/0.8550 area and our base case assumes this is the bottom of the trading range this quarter.

This would represent a 1.1765 ceiling for GBP/EUR.

The ECB held interest rates at 4.50% at the latest council meeting, but there was some slightly less hawkish rhetoric from ECB Bank President Lagarde.

MUFG is still backing a rate cut in June, but notes the potential for an earlier cut; “We can see the logic in this market reaction and given by April we will have three more months of inflation data, there is an argument to be made that positive inflation prints over that period could still open up the scope for a rate cut by April.”

MUFG added; “the tone in which the inflation backdrop in the euro-zone was described today was on the more dovish side compared to December, which leaves the risk bias for EUR skewed to the downside for now.”

Danske Bank takes a similar view; “Markets are pricing 20bp by the April meeting, which must be considered a live meeting. We stick to our call of a first rate cut coming in June, but highlight our long held risk bias of an April meeting cut. The question now is when/ how many there will come.”

According to Nordea; “Lagarde’s reluctance to exclude an April rate cut leaves the market free to increase rate cut pricing further, if economic data weakens and inflation continues to lose momentum.”

CMC Markets Chief Market Strategist Michael Hewson criticised the bank’s communication; “My issue is and has consistently been them pushing back on the timing of rate cuts and saying something along the lines of ‘the more you try to price in rate cuts, the more we’ll push back against it’ and delay cutting rates.”

He added; “The punishment beatings continue. Germany is in absolute hole with no prospect of getting out of it and yet the ECB seem more worried about inflation than they are about a depression.”

According to Commerzbank; “If the ECB were to be the most hasty of the G10 on the way down, i.e. if it were to be the first to start cutting interest rates, it would be all too obvious that the ECB's interest rate policy has a considerable imbalance towards low interest rates over the interest rate cycle.”

Under this scenario, it considers that lower yields would undermine the Euro and lead to expectations that the ECB is less determined to fight inflation than other central banks, both factors which would undermine the Euro.

In this context, it believes a strong Euro is unlikely beyond the end of 2024.

It adds; “We are only bullish on the Euro in the medium term because our ECB watchers tell us that the market is wrong and that such an early rate cut is unlikely. Not in April, but later.”

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TAGS: Pound Euro Forecasts