Pound to Euro Week Ahead Forecast: A Push Towards 1.18?

February 4, 2024 - Written by John Cameron

STORY LINK Pound to Euro Week Ahead Forecast: A Push Towards 1.18?

Foreign exchange strategists at Credit Agricole forecast that the Pound Sterling (GBP) will strengthen to 1.1900 against the Euro (EUR) by the end of 2024.

Danske Bank still forecasts that the GBP/EUR exchange rate will weaken to 1.1235 this year.

Relative economic expectations remain a key element and GBP/EUR posted 5-month highs at 1.1745 before settling around 1.1720 on Friday.

The Bank of England (BoE) held interest rates at 5.25% at Thursday’s policy meeting which was in line with strong consensus forecasts.

Six members of the committee backed the decision to keep rates on hold while Haskel and Mann continued to vote for an increase in rates due to inflation concerns.

In contrast, Dhingra voted for rate cut due to fears of over-tightening.

Bank Governor Bailey welcomed the progress on inflation, but stated that it was too early to consider a cut in interest rates and the bank would need to be confident that inflation would fall to the 2% on a sustainable basis before considering any cut in rates.

Markets overall were slightly less confident that interest rates would be cut at the May meeting with the decision now seen as a close call with June more likely for a first cut.

Traders are still pricing in four rate cuts for the year.

According to ING; “the Bank’s forecast for inflation – largely above the 2% target for much of the forecast horizon – pushes back against those expectations for an early rate cut. In effect, the Bank is making clear it needs more time and more evidence that the disinflation trend is a true one before it is prepared to firmly step into dovish territory.”

The bank expects the first rate cut in August.

ING expects a 0.85-0.87 EUR/GBP forecast for the first quarter. (1.1495 - 1.1765 for GBP/EUR).

MUFG is positive on the Pound for now; “The February meeting was important in sustaining the belief that the BoE will prove more reluctant in easing its stance given the greater inflation risks given the higher services inflation and wages. With that view maintained, we see scope for GBP outperformance to persist over the shorter-term that may propel EUR/GBP lower from here.”

The bank does, however, expects a reversal once the BoE does start to cut rates; “we see the BoE cutting either in May or June. By then GBP outperformance will likely start to reverse and we then expect EUR/GBP to drift higher.”

It has an end-year GBP/EUR forecast of 1.1495.

CIBC commented; “We anticipate the BoE is likely to continue to preach policy patience as wage growth remains inconsistent with the CPI target while the prospect of a politically inspired fiscal easing in the 6 March budget amplifies policy complications. We anticipate that the BoE will not ease until August.”

It added; “Although higher rates should prove GBP supportive, we remain mindful of sentiment proving compromised by a combination of rising electoral risk and macro stagnation.”

According to Danske Bank; Overall, we expect the UK economy to show further signs of weakness, inflation to level off and wage growth to have peaked as shown by recent data releases.

It added; “We see the recent rebound as attractive levels to sell GBP.”

Standard Chartered added; “We already expect EUR/GBP to depreciate to just under 0.9000 by early 2025. (1.11 for GBP/EUR).

It added; “The more rapid pace of easing that we now see adds a little more risk of GBP underperformance in coming months.”

The headline Euro-Zone inflation rate declined to 2.8% for January from 2.9% previously, but this was slightly above consensus forecasts of 2.7%.

Similarly, the core rate of 3.3% was slightly above market expectations of 3.2%, but retreated from 3.4% for December.

Markets overall remained confident that the ECB would cut interest rates in April.

MUFG commented; “We believe the ECB is probably being overly cautious and pessimistic about inflation and there remains scope for the ECB to ease by April.

Credit Agricole’s key consideration is the negative Euro-Zone outlook; “Given the still-dire outlook for the Eurozone economy and evidence of persistent disinflation, investors used these comments as an excuse to maintain their very dovish ECB outlook.”

It added; “At the same time, both the Fed and the BoE were more successful in pushing back against the aggressive market rate cut expectations. As a result, the EUR saw its appeal diminished across the board.”

CIBC remains also cautious over the Euro-Zone economy. It noted; “While there may be signs of a bottoming out in activity, we expect immediate monetary policy inertia. In terms of macro dynamics, we would underline weakening real economy data, including weak German factory orders, reflecting Chinese demand dynamics and ongoing Red Sea supply pressures.”

It still expects GBP/EUR to weaken gradually to 1.1500.

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TAGS: Pound Euro Forecasts