Pound to Euro Week Ahead Forecast: ECB Tipped to Cut This Week

September 8, 2024 - Written by John Cameron

STORY LINK Pound to Euro Week Ahead Forecast: ECB Tipped to Cut This Week

MUFG expects the Pound to Euro (GBP/EUR) exchange rate to edged lower to 1.17 by the second quarter of 2025.

In contrast, Barclays expects resistance levels will eventually break with the potential for GBP/EUR to strengthen to 1.21 over the medium term.

GBP/EUR was held in relatively tight ranges during the week, but drifted lower amid limited selling pressure in equity markets.

There are very strong expectations that the ECB will cut interest rates again this week and overall yield trends will remain crucial for GBP/EUR.

The UK data was broadly firm during the week with further evidence of solid growth which helped curb any significant selling pressure on the Pound.

The crux of MUFG’s argument is that it sees scope for the Bank of England to cut rates more than expected by markets.

In contrast, it sees scope for the ECB to cut rates less than expected by traders.

MUFG commented; “we see scope for the BoE cutting one additional time beyond our previous expectations of four cuts by mid-2025 which has led us to slightly adjust higher our EUR/GBP level.”

ING also expects BoE resistance to rate cuts will fade; “Sticky services inflation and a more hawkish tone from the Bank of England means investors are starting to price a less aggressive easing cycle in the UK relative to the US. We doubt that divergence will last long.”

The Euro-Zone economy will be an important element.

Nomura maintains a downbeat stance; “As we retain a somewhat bearish view on the European outlook, it is hard for us to become particularly enthusiastic on EUR outperformance. Unless and until inflows into the euro area come about because of more idiosyncratic strength in the region, we would expect EUR to remain a broad under-performer in the G10 space.”

Barclays looked at the EUR/GBP technical outlook; “Any gain towards 0.8492/0.8500 is likely to draw sellers looking for an eventual failure of that nearby support line. That would allow the market to push on towards 0.8330 and those lower mid-term targets down at 0.8200.(1.21 for GBP/EUR).

In France, President Macron appointed former Brexit negotiator Barnier as Prime Minister

Credit Agricole remains uneasy over the outlook; “In particular, FX investors will keep an eye out for any potential contagion from the very elevated OAT-Bund yield spread to the peripheral yield spreads to Bunds as a signal to sell the EUR.”

ING had a more positive take; “Barnier’s appointment can be a EUR-positive on the margin ahead of an intense EU budget season over the next couple of months. The fact that a candidate was finally picked is a signal that the more fringe parties in the French Parliament are opening up to dialogue.”

The bank is still concerned over the fiscal outlook which will hamper the Euro.

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TAGS: Pound Euro Forecasts