Pound to Euro Exchange Rate Forecast For Week Ahead: 1.136-1.197 Ranges This Year

June 23, 2024 - Written by John Cameron

STORY LINK Pound to Euro Exchange Rate Forecast For Week Ahead: 1.136-1.197 Ranges This Year

After initial strength on French political concerns, ING is still forecasting that the Pound to Euro exchange rate (GBP/EUR) will weaken to 1.1365 on a 12-month view.

MUFG, however, expects GBP/EUR gains to at least 1.1975.

After gains to 22-month highs the previous week, GBP/EUR continued to correct with a retreat to around 1.1820.

French political concerns eased slightly while Labour maintained a commanding lead in opinion polls.

UK economic developments overall were a slight negative for the Pound.

The Bank of England held interest rates at 5.25% at the latest meeting which was in line with consensus forecasts.

There was another 7-2 vote for the decision as Dhingra and Ramsden voted to cut rates by 25 basis points to 5.00%.

There was, however, a significant element of division within the majority that voted for unchanged rates.

It suggested that four members were still concerned over inflation trends, but three members were more confident that deflation trends remained on track and considered that the decision this month was finely balanced.

MUFG commented; “For the BoE to begin cutting rates, it only requires three more MPC members to change their votes from in favour of keeping rates on hold to in favour of a cut at upcoming policy meetings. It keeps alive our expectation for the BoE to begin cutting rates at the next MPC meeting in August.”

ING added; “The Bank has generally been more reluctant than the European Central Bank to pre-commit to a course of action ahead of time. But it's clear the committee is getting closer to the point of cutting rates. Assuming the next inflation report in mid-July doesn't contain any nasty surprises, we still think the Bank will vote for a rate cut in August.”

Overall markets moved to price in at least a 60% chance of an August move.

The bank is likely to firm-up guidance once the General Election has taken place.

ING commented; “Watch out for any speeches getting put into the calendar just after the UK election on 4 July, where officials like Bailey or his deputy governors/chief economist might look to firm up expectations for a summer cut.”

Lower yields will tend to undermine the Pound, but some investment banks have suggested that the impact of an August rate cut is likely to be limited.

According to MUFG; “The price action provides an indication that an earlier BoE rate cut in August is unlikely on its own to trigger a reversal of pound outperformance so far this year.”

It added; “The BoE would have to send a stronger dovish signal that they are prepared to cut rates more quickly and deeply going forward. In the near-term, we expect political risks in Europe to be a more important driver of pound performance.”

Danske noted that economic developments may not back multiple BoE rate cuts; “We remain negative on GBP but note that with risks to both growth and inflation tilted to the topside, this leaves a more challenging backdrop for an impending BoE cutting cycle.”

Although immediate concerns have eased slightly, markets remain nervous ahead of the French parliamentary elections with the first-round vote on June 30th.

ING expects European politics will provide some near-term Pound support; “Given both the Bank of England and the Swiss National Bank earlier today noted the impact of European politics on financial markets, it is probably a little dangerous to expect too much strength in EUR/GBP until we have seen the outcome of the French election later this month.”

The Euro-Zone PMI data was also weaker than expected with the composite PMI index retreating to a 3-month low of 50.8 from 52.2 the previous month.

The data triggered fresh doubts over the potential for a Euro-Zone economic recovery and will tend to limit Euro support.

Danske notes a mixed outlook for the Pound; “Overall, we see relative rates as a negative for GBP but note with risks to both growth and inflation tilted to the topside, this leaves a more challenging backdrop for an impending BoE cutting cycle.

It still expects a GBP/EUR decline to 1.15 on a 12-month view.

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TAGS: Pound Euro Forecasts