Pound to Euro Exchange Rate Forecast: GBP/EUR Slides as BoE Speculation Builds

March 23, 2024 - Written by John Cameron

STORY LINK Pound to Euro Exchange Rate Forecast: GBP/EUR Slides as BoE Speculation Builds

The Pound to Euro (GBP/EUR) exchange rate retreated after Thursday’s Bank of England (BoE) policy decision and selling has continued to Friday with markets more confident that the central bank would cut interest rates at the June policy meeting.

GBP/EUR retreated to 2-month lows at 1.1640 after Friday’s European open.

Stronger-than-expected German business confidence data also underpinned the Euro.

UK data was mixed while a further advance in UK equities may cushion the currency to some extent.

ING expects near-term GBP/EUR support at 1.1625.

UK retail sales volumes were unchanged for February following a revised 3.6% jump in January and compared with consensus forecasts for a 0.4% decline.

There was an increase in clothing and department store sales offset by a decline in food and fuel sales.

Sales declined 0.4% in the three months to February and 1.0% over the year.

ONS senior statistician Heather Bovill commented; “Many shops told us that an extremely wet February reduced in-store sales. But with people staying indoors, we saw a boost of 2.1% on the amount spent online.”

The UK GfK consumer confidence index held at -21 in March compared with expectations of a small net improvement to -19.

There was still a net improvement from -36 last year.

GfK Client Strategy Director Joe Staton noted that the Personal Finance measure improved to +2 which was the highest figure since December 2021.

He did, however, express concerns over the underlying outlook. According to Staton; “Look back to last year and it’s clear the improvements in consumer confidence seen most months since January 2023 have vanished.”

According to Staton; “Are we temporarily on pause, or are consumers about to press ‘reverse’? In the run-up to the next UK General Election, these are important questions for the future health of the economy.”

Capital Economics assistant economist Alex Kerr painted a relatively optimistic picture; "The prospect of interest rate cuts and the boost to real household incomes from lower inflation and the 2p cut to national insurance in April suggest the recovery in real consumer spending will continue throughout this year.”

Bank of England expectations and yield trends will remain a key element for market moves.

In comments to the FT following the latest Bank of England policy meeting, Governor Bailey stated that it was not unreasonable to expect a cut in interest rates this year.

Bailey also expressed optimism that second-round effects would not come through from the labour market.

According to MUFG; “It read to us like an interview in which Bailey was more than happy to feed speculation of a rate cut by June – which is now close to fully priced.”

It added; “Going forward, we believe it remains a close call but do now see a higher chance of a June cut versus our original call for August being the starting month for cuts.”

According to MUFG The pound could therefore suffer further over the short-term if the markets conviction on a June rate cut grows further and with that the potential extent of rate cuts in total delivered this year. The EU-UK 2-year rate spread is moving in favour of higher EUR/GBP and real yield UK-US spreads also point to the potential for broader GBP underperformance after a period of outperformance year-to-date.”

The German IFO business confidence index posted a significant advance to a 9-month high of 87.8 for March from a revised 85.7 the previous month and well above consensus forecasts of 85.9.

There were net gains for the current conditions and expectations components.

According to ING; “The softness in GBP is something that we had expected given we have long been more dovish than markets on the BoE, but might have come a bit earlier than what we have anticipated. EUR/GBP may struggle to find much more support above 0.8600 as UK data still has to validate the recent repricing of the Sonia curve.”

This equates to GBP/EUR support around 1.1625.

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TAGS: Pound Euro Forecasts