Pound to Euro Forecast for Week Ahead: 1.20 in Sights as BoE Caution Prevails

September 22, 2024 - Written by John Cameron

STORY LINK Pound to Euro Forecast for Week Ahead: 1.20 in Sights as BoE Caution Prevails

Rabobank forecasts that the Pound to Euro (GBP/EUR) exchange rate will strengthen to 1.2050 on a 6-month view.

Nomura sees scope for short-term Pound gains but with the risk of a significant retreat to 1.1630 by the end of 2024.

Investment banks in general are wary over the UK fiscal outlook which could undermine the economy and trigger faster interest rate cuts.

A sharp retreat in consumer confidence for September could be a harbinger of more vulnerable conditions.

The Bank of England (BoE) held interest rates at 5.00% which was in line with consensus forecasts.

There was an 8-1 vote for the decision with Dhingra dissenting and calling for a further cut in rates.

The Pound has maintained its yield advantage over the Euro and GBP/EUR hit 2-year highs just above 1.1920 after the decision.

According to Nomura; “We see a much stronger likelihood of just a single 25bp cut this year, in November, and as such think GBP can find support an interest rate perspective, as easing proceeds more slowly than the market is pricing.”

It added; “for now, we continue to favour GBP upside trades.”

ING commented; “Sterling's rally on yesterday's Bank of England communication looks fully justified. UK short-dated yields rose relative to their eurozone counterparts as the BoE stuck to the new script of 'gradual' easing.”

It sees scope for a GBP/EUR challenge on 1.20 in the near term.

Goldman Sachs expects structural Pound demand will remain firm; “UK equities have been more insulated in recent periods of risk-off, which is one of the reasons our portfolio strategists have turned bullish and are looking for additional inflows.”

Goldman added; “we think the currency should still benefit from a coordinated easing cycle where the US avoids recession, and particularly like being long on crosses.”

HSBC expects the Pound will run out of steam; “It is less clear what can boost GBP’s strong run further, especially when some positioning metrics suggest it is a very crowded long.”

HSBC also sees structural vulnerability; “Delving deeper into the UK’s BoP data paints a picture whereby the currency has been propped up by other investment inflows rather than sturdier forms of capital.”

Nomura does see barriers to sustained Pound gains; “GBP long positioning is much reduced from its peak in mid-July, although it has been building again in recent weeks. This, as well as the new Labour government’s first budget in October, are potential risk factors that could curb our enthusiasm for GBP.”

According to MUFG; “we still believe that by the November MPC meeting we will have had more evidence of underlying inflation pressures easing and wage growth slowing further.”

It sees potential for cuts in November and December.

Rabobank commented; “Looking ahead, we see scope that GBP can continue its slow burning recovery. On the back of a more aggressive pace of Fed easing, we see scope for EUR/GBP to reach 0.83 on a 6-month view. (1.2050 for GBP/EUR).

It did issue a caveat; “That said, the budget may complicate this outlook. Not only may it sour investor sentiment, but a hefty round of tax hikes could impact market expectations regarding the pace of BoE easing.”

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TAGS: Pound Euro Forecasts