Pound to Euro Forecast for Week Ahead: 1.20 Fades, Where Next?

October 6, 2024 - Written by Frank Davies

STORY LINK Pound to Euro Forecast for Week Ahead: 1.20 Fades, Where Next?

Credit Agricole remains comfortable with an end-2025 Pound to Euro (GBP/EUR) exchange rate forecast of 1.2050.

MUFG expects a retreat to 1.1765 by the third quarter of next year.

GBP/EUR posted sharp losses to 2-week lows near 1.1850 before a recovery to near 1.1950.

The Pound was undermined by dovish comments from Bank of England Governor Bailey during the week, although this was partially reversed after commentary from chief economist Pill.

Bailey stated that if the news on inflation continued to be good there was a chance of the Bank becoming more “a bit more activist” in its approach to cutting interest rates.

Pill was significantly more cautious “While further cuts in Bank Rate remain in prospect should the economic and inflation outlook evolve broadly as expected, it will be important to guard against the risk of cutting rates either too far or too fast.”

Rabobank; “the perception that the BoE may cut interest rates more cautiously than the Fed and potentially the ECB have been a source of support for the pound. This view has been deeply shaken by comments made by BoE Governor Bailey in an interview with the Guardian newspaper.”

Markets are very confident that rates will be cut in November and potentially December.

Strong expectations of an October ECB rate cut limited any potential Pound selling.

Credit Agricole commented; “The EUR could remain vulnerable to any potential data disappointments in the near term as well as evidence that there is a growing number of Governing Council members that support a policy rate cut in October.”

MUFG has shifted its stance on UK rates; “As global inflation continues to fall and as the economy slows after the strong first half of the year, the BoE’s confidence in bringing inflation back to target over the medium-term will rise. We expect that to open up the scope for a faster pace of easing and we now expect back-to-back rate cuts in November and December.”

Markets are also continuing to debate the impact of fiscal policy.

According to Bank of America; “Overall, we think the October budget is likely to be net growth positive relative to March. Fiscal policy is still likely to be in consolidation mode, but the extent of tightening should be lower.”

It added; “Less fiscal tightening adds to the case for a cautious rate-cutting cycle from the BoE.”

Credit Agricole expects growth dynamics will be crucial; “of key importance for the market participants would be any indications that the restrictive BoE policy stance together with the looming fiscal austerity planned by the Labour government have ground the nascent economic recovery to a halt in Q3.”

The headline Euro-Zone inflation rate declined to 1.8% for September from 2.2% previously, increasing confidence that inflation pressures are subsiding rapidly. With a series of weak Euro-Zone data releases, markets were increasingly confident that the ECB would cut interest rates again at the October policy meeting.

HSBC added; “The fact that much of the weakness lies in the core economies of the Eurozone is perhaps of even greater concern.

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TAGS: Pound Euro Forecasts