Pound to Euro Week Ahead Forecast: Debt Fears Unsettle Sterling

November 3, 2024 - Written by Frank Davies

STORY LINK Pound to Euro Week Ahead Forecast: Debt Fears Unsettle Sterling

The Pound to Euro (GBP/EUR) exchange rate dipped sharply to 6-week lows below 1.1850 after the UK budget before a recovery to near 1.1950.

The Euro was also boosted by a scaling back of aggressive ECB rate cut expectations.

Goldman Sachs expects a medium-term advance to 1.22.

MUFG is more cautious over the longer-term and, after near-term gains to 1.2050, it expects a gradual GBP/EUR retreat to 1.1765 by the third quarter of 2025.

Chancellor Reeves announced tax increases of £40bn in the budget, but there were even sharper spending increases and higher borrowing estimates.

MUFG commented; “While the government stressed the need to fill a fiscal black hole of around GBP20 billion left by the previous government, the decision to raise sending by around GBP70 billion per year over the next five years which is only partially offset by tax rises of around GBP36 billion per year has raised doubts over their commitment to fiscal consolidation.”

There were sharp losses in gilts with the 10-year yield spiking to a 12-month high above 4.50% before settling around 4.45%.

Higher yields provided theoretical Pound support, but this was offset by fears over a slide in the bond market.

ING commented; “This is the “bad” kind of rise in yields, from a sterling perspective. However, we suspect some of sterling’s drop was due to some positioning squeeze (remember GBP was the largest speculative long in G10 last week), and an extended severe depreciation would require a disorderly gilt selloff, which is not our base case.”

There was fresh uncertainty over Bank of England policies.

Traders are confident that the BoE will cut rates this week, but there are further doubts whether there will be another cut in December.

MUFG commented; “We still expect the BoE to cut rates more than the market is expecting but the outlook for higher yields to remain in place for longer now could encourage a stronger pound when the Gilt market eventually settles down.”

HSBC considered the potential impact on inflation and interest rates; “If businesses choose to protect profits by cutting costs, slowing pay growth or weaker demand for new workers, this could lead to a softer labour market and weaken persistent inflation.”

Goldman is still positive on the Pound outlook; “we think the positive signals from the hard data continue to argue for a Sterling-supportive domestic backdrop, as well as benefitting from more global factors including its positive beta to risk. We continue to like Sterling longs, and our preferred expression remains our open short EUR/GBP recommendation, targeting a move to 0.8250.”

According to Credit Agricole; “We think that the government should ultimately succeed in appeasing the gilt vigilantes. That being said, if sustained, the spike of sovereign credit risks could damage the GBP investment appeal across the board.”

It did add; “In all, we expect the BoE to be successful in stabilising the GBP.”

Euro-zone data was stronger than expected during the week.

Provisionally, there was 0.4% GDP growth for the third quarter compared with consensus forecasts of 0.2%.

The headline inflation rate increased to 2.0% from 1.7% and above expectations of 1.9% while the core rate held at 2.7%.

There was a shift in ECB expectations with much less confidence that the central bank would cut rates by a further 50 basis points in December.

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TAGS: Pound Euro Forecasts