Pound to Euro Week Ahead Forecast: 1.1240-1.2050 12-Month Ranges

April 21, 2024 - Written by John Cameron

STORY LINK Pound to Euro Week Ahead Forecast: 1.1240-1.2050 12-Month Ranges

Foreign exchange strategists at Danske still expect the Pound to Euro (GBP/EUR) exchange rate will slide to 1.1240 in the next twelve months.

In contrast, BNP Paribas expects GBP/EUR will strengthen to 1.2050 at the end of 2024.

GBP/EUR retreated to 1-week lows just below 1.1670 during the week before settling just above this level.

Danske expects that the Bank of England will adopt a dovish stance. According to the bank; “We expect upcoming data to increasingly support this notion. 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.”

Danske also pointed to underlying fundamental weakness for the Pound; “The UK runs a large current-account deficit, which makes GBP vulnerable when capital inflows fade; this keeps GBP at risk vs EUR in the wake of a risk sell-off.”

UK labour market and inflation data was slightly stronger than expected during the week.

The UK headline annual increase in wages held at 5.6% in the year to February and compared with expectations of 5.5% while the unemployment rate increased to 4.2% from 3.9%.

As far as inflation is concerned, the headline rate slowed to 3.2% from 3.4%, but slightly above expectations of 3.1% with the core rate at 4.2% from 4.5%.

Potential Pound support from the data was offset by relatively dovish rhetoric from Bank of England Governor Bailey who stated that inflation will decline further in the short term.

The market consensus is that rates will be cut in August, although a significant minority expect an earlier move.

ING expects BoE caution; “data this week has pointed to a lower probability that the BoE will start cutting rates before August, which is the month when our economist expects the first move.”

According to the bank; “That has led us to believe that EUR/GBP will struggle to find much support in the short term, despite our medium-term call on the pair being moderately bullish.”

ING added; “If we do see a geopolitical risk escalation, GBP should, however, be in a more vulnerable spot than the euro, given the pound’s higher sensitivity to global risk sentiment and CFTC data showing that GBP has the largest net-long positioning in G10.”

Credit Agricole also expects that the BoE will have to maintain a hawkish stance as Pound losses, especially against the dollar would fuel inflation.

According to the bank; “As a result, we continue to think that the BoE could emerge as one of least dovish G10 central banks this year and this underpins our constructive outlook on the GBP vs the likes of the EUR.”

On a medium-term view, BNP expects that fiscal and political developments will support the Pound.

The bank considers that there is over a 95% chance of a Labour majority following an election late this year and the fiscal stance will be important for financial markets. According to the bank; “Public spending that is implemented responsibly and is redistributive can support UK growth.”

As far as the Euro is concerned, there are very strong market expectations of a June ECB rate cut.

ECB Vice President Luis de Guindos commented this week; "I think that we have been crystal clear: if things continue as they have been evolving lately, in June we'll be ready to reduce the restriction of our monetary policy stance."

Fellow council member Villeroy appeared to back a further cut in July; "Our best estimates for the euro area is between 2% and 2.5%, so we still have ample room while remaining in restrictive territory, to ease and to cut rates."

Hawks, however, will inevitably push back against these expectations.

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TAGS: Pound Euro Forecasts