Pound to Euro Week Ahead Forecast: GBP/EUR Risk Conditions Dominate

August 11, 2024 - Written by John Cameron

STORY LINK Pound to Euro Week Ahead Forecast: GBP/EUR Risk Conditions Dominate

RBC Capital Markets (RBC) is wary over buying the Pound to Euro (GBP/EUR) exchange rate in the short term due to risk stresses and, although medium-term forecasts have been revised higher, the bank still expects a decline to 1.1240 at the end of 2025.

Standard Chartered is notably more positive on the Pound and recommends buying GBP/EUR with a 3-month forecast of 1.1820.

Risk conditions have dominated the Pound performance during the week.

When markets dipped very sharply early in the week, the Pound came under notable pressure with GBP/EUR sliding to 3-month lows just below the 1.1600 level.

There were very sharp markets moved as US recession fears intensified. According to Nordea; “The market-moves looked vastly overdone compared to the new information.”

The sense of panic subsided later in the week with risk currencies recovering ground.

As conditions improved, GBP rallied to 1.1670.

Looking at interest rates, markets expect that the Bank of England will cut rates by a further 25 basis points to 4.75% at the November policy meeting with the possibility of two cuts before the end of 2024.

RBC agrees with a November cut, but also expects that there will be a very cautious BoE policy stance in 2025, especially with the government sanctioning higher wage settlements for key public-sector workers.

It expects only two further rate cuts totalling 50 basis points next year and added; “With markets pricing a total of -100bps by next May, there is space for rate dynamics to buoy GBP, and this pace of cuts would still leave the UK with relatively high rates in G10.”

There are, however, still questions over the UK fundamentals.

RBC also notes that Chancellor Reeves claimed that there was a £22bn fiscal black hole in government finances while the government has also announced real-terms wages increases for key public sector workers.

If the government wants to meet fiscal targets there will need to be fiscal tightening in the end-October budget.

RBC commented; “the fiscal backdrop remains constrained, and thus any deterioration in credibility would leave GBP vulnerable, as we think the currency is not carrying much of a risk premium.”

According to Bank of America; “So the 30 Oct Budget will have a big influence on the November MPC decision, and a cut in advance of that information’s arrival would need material weakness in inflation or activity beforehand, we would say.”

BoA maintains a positive stance towards the UK currency; “We remain constructive GBP and would buy dips against EUR and CHF. Our estimates suggest that the market is long, but we believe this is because of improving fundamentals from mainstream policies of the new government and intentions of the latter to have better relations with the EU.”

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TAGS: Pound Euro Forecasts