Pound to Euro Week Ahead Forecast: GBP/EUR's Future Uncertain Among Analysts

September 15, 2024 - Written by John Cameron

STORY LINK Pound to Euro Week Ahead Forecast: GBP/EUR's Future Uncertain Among Analysts

RBC Capital Markets (RBC) forecasts that the Pound to Euro (GBP/EUR) exchange rate will weaken gradually to 1.1240 on a 12-month view.

In contrast, Barclays expects GBP/EUR to strengthen to 1.25.

GBP/EUR was held in relatively tight ranges during the week and settled just above 1.1850.

Barclays is positive on the UK outlook; “Demand resilience has been in evidence across recent data releases, supporting the case for a slow and relatively shallow cutting cycle by the MPC that maintains the pound's carry advantage. Supply-side gains are also likely given the new UK government's intention to pursue a closer EU-UK relationship.”

RBC admits that yields will tend to favour the Pound, but will not be sufficient to support the UK currency; “Although our expectation for a shallow BoE rate cutting cycle suggests markets are overpricing rate cuts over the next 12m, and we expect the UK will retain a yield advantage in G10, we think GBP faces more downside than upside risk, as the most recent market rout showed in early August.”

RBC notes that there are substantial long Pound positions amongst global traders and that the currency is overvalued from an historical perspective.

It added; “A currency being overvalued does not automatically mean that the currency will fall, but if any concerns about the growth outlook or fiscal credibility rise or there is an external risk-off shock, then GBP is vulnerable.”

UK GDP was unchanged in July for the second successive month.

HSBC commented; “None of this is good news for an economy which relied on government spending and inventories for growth in Q2.”

There are strong expectations of tax increases in the October budget.

Barclays expects only a limited and short-lived Pound setback; “Perceived anti-growth measures such as tax hikes and fiscal tightening tend to weigh on the pound; however, their size (c.0.5-1% of GDP) does not appear large enough to derail sterling's positive momentum.”

Credit Agricole sees barriers to Pound gains; “In all, we believe that many positives are already in the price of the overbought GBP by now and it could take hawkish BoE surprises or evidence of stickier inflation or more resilient retail sales to see the currency gaining more ground.”

MUFG sees Pound vulnerability in the fourth quarter; “We do not expect the BoE to cut rates again until the November MPC meeting, but there is an increasing likelihood that the BoE could deliver back-to-back cuts in November and December that could trigger some reversal of pound strength if the BoE shifts to a faster pace of cuts later this year.”

The ECB cut the deposit rate by 25 basis points to 3.50% at the latest policy meeting, in line with strong market expectations.

The central bank continued to insist that it was data dependent with only a slow rate of easing and the Euro was resilient.

Unicredit commented; “We remain confident with our forecast that the deposit rate will decline by 25bp per quarter throughout 2025, with the next move due in December.”

Credit Agricole commented on potential economic risks; “the EUR could suffer if Eurozone stocks weaken while peripheral spreads start to widen once again.

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TAGS: Pound Euro Forecasts