Euro to Pound Forecast: EUR/GBP at 0.8540 "Likely to Drift Higher" say SocGen

April 19, 2024 - Written by John Cameron

STORY LINK Euro to Pound Forecast: EUR/GBP at 0.8540 "Likely to Drift Higher" say SocGen

Pound Sterling Sinks after Dovish Bank of England Bailey Comments, GBP/EUR Exchange Rate Retreats to Below 1.1700

Overall interest rate expectations continue to drive major currencies.

The bias on Thursday has been greater confidence in early Bank of England rate cuts, allied with some doubts whether the ECB will be as aggressive.

In this context, the Pound to Euro (GBP/EUR) exchange rate failed to hold 1-month highs above 1.1700 on Wednesday and retreated to 1-week lows near 1.1670 before settling around 1.1680.

According to ING; “Our bias now for EUR/GBP is to 0.86 and above.” (1.1630 and below for GBP/EUR).

Although the latest UK inflation data was slightly higher than expected, Bank of England (BoE) Governor Bailey was more optimistic that UK inflation was on track to decline to the 2% target level.

There has also been a slight adjustment in ECB interest rate expectations with some doubts whether substantial interest rate cuts will be achievable given a still tight labour market.

In comments on Wednesday, Bailey stated that there would be a notable decline in the inflation next month, especially with a very favourable base effect given strong price increases last year.

Bailey is confident that the disinflation process is continuing and added that; "Our judgement with interest rates is 'how much do we need to see now to be confident of the (disinflation) process.”

Bailey also commented that there are notably different inflation trends across major economies.

According to Bailey; "The dynamics for inflation are rather different now, between Europe and the U.S. I think there's more demand-led inflation in the U.S. than we're seeing.

ING noted that the IMF made a similar point with the UK running a negative output gap while there is a positive one in the US.

This would imply that the UK need for a restrictive monetary policy is much less than in the US.

ING added; “This begs the question of why the market is pricing the same amount of easing this year - 45bp - for both the Fed and the BoE. We can see those expectations shifting over the coming months as more BoE easing is priced. This will be negative for sterling.”

Danske Bank expects that the latest wages data will stop a rate cut in May and expects a first BoE rate cut in June.

It, therefore, expects that the BoE will not cut rates later than the ECB and noted; “Additionally, 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.”

Nordea commented; “With more or less no growth in economic activity in 2023, it’s a bit harder to think of the Euro-area economy as more resilient than expected, but markets are nonetheless pricing out ECB rate cuts too and lifting the end-point of the easing cycle.”

A higher ECB rate profile would tend to underpin the Euro.

The Euro-Zone also recorded a current account surplus of EUR29.5bn for February.

ING noted; “The eurozone enjoyed a near EUR40bn current account surplus in January - a reminder that conditions are very different from when EUR/USD was trading below parity in late 2022 and the Eurozone was running a EUR30bn current account deficit on the back of surging oil and gas prices.”

SocGen is negative on UK fundamentals amid very weak productivity. It adds; “Rate cuts are coming, because without either productivity or employment growth, GDP is doomed to stagnation, but the cutting will start slowly as the MPC frets about wages.”

Socgen added; “EUR/GBP, at 0.8540, is near the bottom of its trading range and likely to drift higher.” (Net losses for GBP/EUR from 1.1710)

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TAGS: Euro Pound Forecasts