Pound to Euro Week Ahead Forecast: 1.1365 in Next 6-12 Months

June 2, 2024 - Written by John Cameron

STORY LINK Pound to Euro Week Ahead Forecast: 1.1365 in Next 6-12 Months

Foreign exchange analysts at Morgan Stanley expect the Pound to Euro exchange rate (GBP/EUR) will strengthen to 1.2200 by the end of 2025.

Danske Bank still expects a retreat to 1.1365 on a 6–12-month view.

There are very strong expectations that the ECB will cut interest rates at this week’s policy meeting, and this is fully priced in.

There is also a very strong likelihood that the European central bank will cut rates ahead of the Bank of England.

GBP/EUR tested the key resistance at 1.1765 during the week before a retreat to 1.1725 after the Euro-Zone inflation data.

ECB forward guidance will be a crucial element for near-term GBP/EUR moves.

Morgan Stanley expects overall yield spreads will underpin the Pound; “While we expect the BoE to cut rates by 200bp by end-2025, it still retains the highest rates in Europe, offering it a bit of carry support too. This allows EUR/GBP to re-test the 2022 low at 0.82.”

According to Bank of America; “The June rate cut is pretty much a done deal by now, but the bickering on the follow-up cuts has started. Remember our base case: three quarterly cuts this year, ie the next one in September, then five more in 2025 to a depo rate of 2%.”

ING commented; “one thing is clear: a longer substantial rate-cut cycle will only materialise if inflation quickly returns to 2%. Any signs of reflation and also stronger economic activity would limit the ECB’s room for manoeuvre. This is why we expect a hawkish cut next week and an ECB that will, at least at the press conference, try not to give any forward guidance.”

HSBC considered the potential for more dovish rhetoric; “A follow-up rate cut in July is viewed as highly unlikely by the market, but the data is mixed enough that President Lagarde may not rule it out entirely in her June press conference.”

Danske Bank does not think that the ECB can sound the all clear on inflation.

According to the bank; “Generally, the euro area economy has proved to be quite resilient this year. The strong labour market was consolidated with the unemployment rate declining to 6.4% yesterday - an all-time low - which bodes well for an uptick in private consumption this year. This also puts upward pressure on domestic inflation.”

Danske added; “we expect the June rate cut of 25bp to be communicated as a roll-back of the ‘insurance hike’ from September last year without a commitment to a specific rate path beyond June. We expect the data-dependent and meeting-by-meeting approach to continue.”

Danske expects narrow GBP/EUR ranges are likely to prevail in the short term with some upward risks.

Nevertheless, it still expects a retreat to 1.1365 on a 6-12-month view.

As far as UK data is concerned, the Lloyds Bank business confidence data posted a strong advance for May to an 8-year high.

Nationwide also reported a 0.4% increase in house prices for May with a 1.6% annual increase.

There was, however, a small decline in mortgage approvals to 61,100 for April from a revised 61,300 the previous month.

The data overall continued to underpin expectations of a gradual recovery in the UK economy, although the overall impact was limited.

Bank of England expectations will remain a key element over the medium term even though the short-term outlook has been obscured by the General Election campaign.

According to Bank of America; “Though a June cut isn't completely ruled out (there is still one labour market and inflation report before the June meeting), we think the BoE will want to wait for more data to grow confident that services inflation and wage growth are, in fact, slowing down meaningfully.”

It added; “The August meeting also gives the BoE an opportunity to provide new forecasts. Moreover, a 4 July UK general election would add an uncomfortable political dimension to the June decision.”

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TAGS: Pound Euro Forecasts