Pound to Euro Week Ahead Forecast: For GBPEUR It’s all about Confidence

August 18, 2024 - Written by John Cameron

STORY LINK Pound to Euro Week Ahead Forecast: For GBPEUR It’s all about Confidence

ING still forecasts that the Pound to Euro (GBP/EUR) exchange rate will weaken to 1.1365 on a 12-month view.

In contrast, Credit Agricole expects a firm Pound tone with GBP/EUR advancing to 1.1900 at the end of 2024.

GBP/EUR lost ground in midweek after the UK inflation data before recovering ground to make a net gain to 10-day highs around 1.1730 as risk appetite improved and Pound confidence held firm.

The headline UK inflation rate increased to 2.2% for July from 2.0% previously, but below consensus forecasts of 2.3% while the core rate declined slightly more than expected to 3.3% from 3.5%.

Labour-market data was mixed with a reported decline in the unemployment rate to 4.2% from 4.4% and contrary to expectations of a small increase. In contrast, there was a slowdown in wages growth.

According to Ruth Gregory, deputy chief UK economist at Capital Economics; "The sharp fall in services inflation from 5.7% to a two-year low of 5.2% will reassure the Bank of England that the disinflation process is on track and opens the door to more interest rate cuts later this year.”

Markets expect two further BoE rate cuts this year.

JP Morgan still expects BoE caution; “with economic growth on a cyclical upswing, there remains a risk that cutting too quickly will fan the inflation flames. We therefore think it’s unlikely that the Bank will follow up its August cut with a cut in September.”

It expects quarterly rate cuts.

ING expects yield moves will undermine the Pound; “Currently, the policy rate spread between the BoE and the ECB is 150bp. We expect this to halve into 2025 and should mean a gently higher EUR/GBP.” (Pound losses)

ING added; “In the UK, the 30 October budget from the new Labour government will be important. This could be restrictive and hit sterling with a tighter fiscal/looser monetary policy mix.”

The German ZEW economic sentiment index dipped sharply to 19.2 for August from 41.8 previously and below consensus forecasts of 35.4 with the current conditions component also deteriorating.

CIBC commented; “German manufacturing sentiment has retreated in the last two snapshots, underlining that weak GDP trends look set to extend into H2.”

It added; “Indeed, speculative long EUR positions, are likely to prove to be contained and could limit EUR upside.”

ING is cautious over the Euro-Zone outlook; “With recent numbers casting doubt about service sector strength, expectations for GDP growth in the rest of the year have weakened.”

Credit Agricole commented; “If anything, risks of a less dovish policy outcome appear higher for the BoE than for the ECB, given the very tight vote split and caution expressed by BoE Governor Andrew Bailey with regards to not lowering rates too quickly nor by too much.”

It added; “EUR/GBP may just be poised for a very slow grind lower towards 0.84 for the remainder of the year.”

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TAGS: Pound Euro Forecasts