Pound to Euro Week Ahead Forecast: ECB Rate Cut Trumps BoE Speculation

October 20, 2024 - Written by David Woodsmith

STORY LINK Pound to Euro Week Ahead Forecast: ECB Rate Cut Trumps BoE Speculation

Goldman Sachs expects further short-term Pound to Euro (GBP/EUR) exchange rate gains to 1.2120 and maintains a 12-month forecast of 1.2200.

Although RBC Capital Markets (RBC) expects near-term support, it expects a steady decline to 1.1240 on a 12-month view.

GBP/EUR posted sharp gains to 30-month highs at 1.2050 during the week before a retreat to 1.2000.

Interest rate decisions and expectations remained a key element during the week with an ECB rate cut and stronger expectations of UK rate cuts.

The UK inflation data was significantly weaker than expected with the headline rate declining to 1.7% from 2.2% previously and below consensus forecasts of 1.9%.

The underlying rate also retreated to 3.2% from 3.6% and below market expectations of 3.4%.

The data reinforced already strong market expectations that there would be a cut in interest rates at the November meeting and there was stronger speculation that there would be a further cut in December.

There were also further expectations of a tight budget at the end of October with hints over higher inheritance tax and Employer National Insurance contributions.

Rabobank commented on Pound sentiment; “more recent fears that the UK’s October 30 budget may increase the tax burden for investors has naturally diminished this optimism.”

Retail sales data, however, was stronger than expected.

According to MUFG; “We still expect the BoE to deliver back-to-back rate cuts in November and December despite the release this morning of stronger UK retail sales growth in September.”

RBC has adjusted its forecast for Bank of England (BoE) interest rates.

The bank now expects that the BoE will cut rates at every meeting between November and May 2025 which would take base rate down to 3.75% from the previous projection of 4.00%.

RBC commented; “Current UK yields may still attract long GBP flows in the short-term, but if investors have been long GBP for carry, then a quicker pace of cuts should see the relative yield advantage dissipate over time.”

It added; “we think the asymmetric risk is to the downside for GBP, especially if there are downside economic surprises and/or the Autumn Budget on October 30 is perceived fiscally contractionary.”

RBC also considers that the Pound is overvalued in real terms, maintaining the risk of a medium-term decline.

According to Goldman Sachs; “while there may be more market jitters in the near term that could challenge GBP longs on the margin, we think the procyclical global backdrop argues for further outperformance.”

The ECB cut interest rates by 25 basis points, meeting consensus forecasts, and there are strong expectations that there will be a further cut in December.

There were also further concerns over the Euro-Zone outlook.

Commerzbank pointed out the risks; “In view of the current election polls in the US and the conflict in the Middle East as well as the war in Ukraine, I think it is unlikely that these risks will diminish in the foreseeable future.”

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TAGS: Pound Euro Forecasts