Pound to Euro Week Ahead Forecast: Slide in Risk Appetite Hurts

August 4, 2024 - Written by John Cameron

STORY LINK Pound to Euro Week Ahead Forecast: Slide in Risk Appetite Hurts

Rabobank expects the Pound to Euro (GBP/EUR) exchange rate to strengthen to 1.2050 on a 6-month view.

ING, however, still expects that GBP/EUR will trade below 1.1765 over the medium term.

GBP/EUR lost ground during the week with a slide to 2-month lows at 1.1725.

The slump in global risk conditions was a key element undermining the Pound, especially late in the week, as equity markets came under sustained pressure amid fears over the global economy.

Domestically, the Bank of England cut interest rates by 25 basis points to 5.00% at the latest policy meeting.

A majority of banks expected a cut, but there was a high degree of uncertainty and the decision was very close with a 5-4 vote in favour.

Governor Bailey stated that caution was needed over the potential for further cuts, but markets still expect at least one further rate cut this year, potentially in November.

HSBC commented; “We agree with the market that the MPC will take a breather next month. The ECB held rates in the meeting that followed its first cut, and the BoE shares its concerns about lingering wage and services inflation pressures. We still expect a 25bp cut in November, and then at each quarterly MPR meeting in 2025.”

According to MUFG; “We expected the August cut and are maintaining our view of one further cut this year – most likely at the next MPR meeting in November. Caution is set to prevail given the very close vote to cut in August.”

Unicredit is less sanguine over the outlook; “We still see a faster and deeper rate cutting cycle than financial markets expect, with 175bp of cuts next year. The reason for our dovish view is that the labor market is clearly weakening, and once unemployment starts rising it tends to keep going as an adverse feedback loop takes hold. This will likely slow wage growth and services inflation more quickly than the MPC expects.

Chancellor Reeves stated that there was a £22bn black hole in government finances and admitted that taxes were likely to increase.

Rabobank is still confident at this stage; “While we recognise that the new government’s honeymoon period could run out of steam, possibly before the UK’s October budget, we continue to favour buying GBP on dips vs. the EUR.”

The latest Euro-Zone inflation data was slightly higher than expected with the headline rate edging higher to 2.6% from 2.5% while the core rate held at 2.9%.

There are still expectations that the ECB will cut rates again in September.

Danske Bank commented; “We see relative rates as rather neutral for EUR/GBP, given our hawkish call on the ECB. We expect EUR/GBP to continue its move lower driven by indicators pointing to a continued (modest) rebound in the global manufacturing cycle, tight credit spreads and low FX volatility.”

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TAGS: Pound Euro Forecasts