Pound to Euro Rate Week Ahead Forecast: Possible 8-Year Best say Analysts

October 27, 2024 - Written by David Woodsmith

STORY LINK Pound to Euro Rate Week Ahead Forecast: Possible 8-Year Best say Analysts

Danske Bank forecasts that the Pound to Euro (GBP/EUR) exchange rate will strengthen to 1.2350 on a 6-month view as UK yields remain attractive.

In contrast, ING expects that GBP/EUR will weaken to 1.1630 by the second quarter of 2025.

During the week, the Pound to Euro (GBP/EUR) exchange rate strengthened to 1.2050 before settling just below 1.2000 as the Euro attempted to pare wider losses.

UK business confidence data was weaker than expected, but markets have tended to focus more on fiscal policy at this stage.

There are strong expectations that Chancellor Reeves will tighten fiscal policy in this week’s budget, but the fiscal rules will be adjusted to allow a substantial increase in borrowing to fund medium-term investment. There are tensions over the debt outlook and UK yields have moved higher.

ING commented; “Gilts underperformed other developed market bonds after the fiscal rule announcement, and there seems to be a consensus view that UK yields have extra room to rise on budget news.”

It added; “From an FX market perspective, what matters is whether any gilt underperformance turns into uncontrolled volatility. Given the pound is pricing in no risk premium, the downside risks for the currency would be very large.”

Monetary policy will remain a key medium-term element.

Although markets remain confident over a November interest rate cut, the chances dipped to just below 90% following the fiscal reports.

Danske expects the Bank of England will maintain a cautious stance in the near term. It commented; “While recent data has come in softer than anticipated by the BoE across the board, warranting a November cut, we think they will remain cautious and pause in December.”

In this context, Danske added; “GBP continues to benefit from a cautiously hawkish tone from the BoE signalling a more gradual cutting cycle relative to peers and UK growth outperformance relative to the Eurozone. We think these forces will continue to weigh on the cross also in the coming months.”

Goldman Sachs maintains a positive Pound stance; “Persistence in the trend of more positive growth news from the UK relative to the Euro area, as well as asymmetrically negative risks for EUR versus GBP from current geopolitical and upcoming US election risks are key factors behind our open recommendation to be short EUR/GBP.”

HSBC is less positive on the Pound due to the policy mix; “On the monetary policy front, we expect the dovish momentum around the BoE to continue, aided by the downturn in headline UK inflation. The 30 October budget will add a fiscal headwind to growth. Loose monetary and tight fiscal policy is rarely a currency positive.”

Danske did point to potential pound vulnerability if risk appetite deteriorates; “The UK runs a large current-account deficit, which makes GBP vulnerable when capital inflows fade; this keeps GBP at risk vs EUR in the wake of souring global risk appetite.”

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Pound Euro Forecasts