Pound to Euro Week Ahead Forecast: Buy Dips Below 1.17, as Short-term Uptrend Intact

February 25, 2024 - Written by John Cameron

STORY LINK Pound to Euro Week Ahead Forecast: Buy Dips Below 1.17, as Short-term Uptrend Intact

Bank of America (BoA) analysts forecast that the Pound to Euro exchange rate (GBP/EUR) will strengthen to 1.1905 at the end of 2024.

In contrast, after an initial firm tone, ING expects GBP/EUR to weaken to 1.1365 on a 12-month view.

GBP/EUR dipped to 3-week lows below 1.1660 during the week before a recovery to 1.1715 on Friday.

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According to BoA; “Our increasingly constructive view on GBP is now formally hardcoded into our 24-25 profile.”

The bank considers that the UK economy will strengthen and that this improvement has not been priced in to the UK currency.

The UK economic data was broadly favourable during the week with the PMI data indicating another solid rate of growth in the services sector while the manufacturing sector remaining in contraction territory.

There was a small decline in consumer confidence while the Bank of England (BoE) members continued to indicate that conditions were not ripe for an early cut in interest rates.

Market pricing indicates that there is now only a 50% chance of a June BoE move while a cut is fully priced in for August.

According to MUFG; “For the UK rate market to move to price in an earlier rate cut, the BoE’s optimism over a pick-up in growth at the start of this year would need to questioned.”

It does not expect the BoE to cut rates before other major central banks and added; “As Greene stated yesterday, wage growth “remains a lot higher” in the UK than in the US or in Europe. If the Fed and ECB are delaying the timing of the first rate cut, the BoE will be too.”

The bank added; “The upturn in risk sentiment globally will certainly allow the BoE to remain patient, similar to other central banks. But good news is still coming and the prospects of inflation hitting the 2% target in April remains plausible.“

Danske Bank expects the BoE to deliver the first 25bp cut in June and a total of 75bp for the entire year.

Danske expects near-term Pound support on the back of primarily a sharp BoE repricing. It adds; “However, we expect the UK economy to perform relatively worse than the euro area and expect relative growth outlooks and broad central bank pricing to weigh on GBP.”

Fiscal policy will be monitored closely ahead of the March 6th budget.

Capital Economics economist Ruth Gregory expects a modest tax-cutting package; “We think that probable downgrades to the OBR’s GDP and inflation projections will mean the Chancellor has just £15bn to play with whilst still meeting his fiscal rules.”

The Euro-Zone PMI business confidence data was mixed with further weakness in German manufacturing still a key element.

The German IFO business confidence index edged higher to 85.5 for February from 85.2 previously and in line with consensus forecasts.

There was no change in the current assessment while there was a small recovery in the expectations component.

The IFO Institute commented; “In manufacturing, expectations are virtually as pessimistic as they were the previous month. The decline in the order backlog continues unabated. Companies have announced further cuts to production.”

Nordea commented on ECB policy; “We continue to think most signs and signals point to the ECB moving towards a first rate cut at the June meeting. Labour market developments are important for the ECB, and it will take time to get the important Q1 labour market data, as many Governing Council members have emphasised.”

Nordea added; “We maintain that the risks picture remains tilted towards both an earlier start to the rate cuts than our June call as well as a faster pace of cuts compared to our baseline of quarterly 25bp decreases after June.”

ING considers that the 1.1765 area remains a key resistance for the pair; and added “We suspect that this level may hold and that clearer signs of UK disinflation through the second quarter – and greater conviction over the BoE easing cycle – can see EUR/GBP drift a little higher. (losses for GBP/EUR) We first need to see the two MPC hawks drop their votes for higher rates.

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TAGS: Pound Euro Forecasts