Pound to Euro Week Ahead Forecast: September Holds Key for GBP/EUR

September 2, 2024 - Written by John Cameron

STORY LINK Pound to Euro Week Ahead Forecast: September Holds Key for GBP/EUR

Goldman Sachs forecasts that the Pound to Euro (GBP/EUR) exchange rate will strengthen to 1.22 on a 12-month view.

During the week, GBP/EUR strengthened to 5-week highs just above 1.19 before a correction to 1.1875. The pair remains close to the resistance levels above 1.19 which were tested in July.

Other investment banks such as ING have dropped near-term expectations of GBP/EUR losses.

UK and global developments during September could be crucial in determining whether bearish views are reinstated or dropped more permanently.

ING has been bearish on GBP/EUR, but notes that rates have moved in the opposite direction; “The EUR:GBP 2-year swap rate gap shifted in favour of GBP of late thanks to some hawkish repricing in the Sonia curve and markets adding ECB easing bets yesterday. It is now at -146bp, the widest since February, meaning that a rebound in EUR/GBP now requires a meaningful rebuilding in Bank of England easing expectations.”

It added; “That seems unlikely to happen until we get new tier-one data in the UK, as BoE officials have broadly reiterated a cautious stance on easing.”

Euro-Zone data was an important element for the Euro and GBP/EUR during the week.

There was a further limited retreat in the German IFO business confidence index, reinforcing concerns over the outlook.

Oxford Economics commented; 'We think it will take Germany's manufacturing sector until the end of this year to emerge from the economic slump, but the deterioration in the services sector highlights the broad weakness in the German economy.”

German and Spanish inflation readings for August were weaker than expected.

The headline Euro-Zone inflation rate declined to 2.2% for August from 2.6% previously which was in line with consensus forecasts and the lowest reading for three years.

The core rate edged lower to 2.8% from 2.9%.

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

Domestically, the Lloyds Bank business confidence index held at 50% for August.

Hann-Ju Ho, senior economist at Lloyds Bank Commercial Banking, commented; “Overall, the economy looks to be stable and from the positive results recorded, businesses are echoing this sentiment.”

According to Goldman Sachs, UK data signals have been important; “Whereas our constructive view on the Pound relies heavily on its external betas, with the positive global risk sentiment on the back of lower yields helping the currency, domestic data are now playing an increasingly important role.”

JP Morgan noted the recent firm UK data and was particularly impressed by the employment components within the PMI report.

The bank has previously recommended buying GBP/EUR and maintains a positive stance; “We think the relative growth dynamics alone justify the pair trading cheap to fair value, and so that partly motivates our decision to keep the trade on. Elsewhere, we see a potential further normalisation in FX volatility as being favourable for the trade, making it more attractive for GBP longs.

It also considers that GBP/EUR has weathered traditionally negative seasonal factors during the Summer period which increases the scope for gains.

Rabobank also maintains a positive stance; “we look for the pound to perform well against both the USD and the EUR into next spring.”

Credit Agricole expects European currencies will struggle, but with scope for net GBP/EUR gains; “We continue to see the risks for both the EUR and the GBP to the downside from current levels in the near term. In that, the combination of weak economic data, dovish central bank rhetoric and persistent political risks could make the EUR the relative underperformer.”

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TAGS: Pound Euro Forecasts