Pound to Euro Week Ahead Forecast: EUR concerns intensify, GBP Gains?

November 10, 2024 - Written by Frank Davies

STORY LINK Pound to Euro Week Ahead Forecast: EUR concerns intensify, GBP Gains?

Foreign exchange analysts at MUFG expect that the Pound to Euro (GBP/EUR) exchange rate will strengthen towards 1.22.

The consensus view is that a slow pace of Bank of England rate cuts, allied with difficulties in the Euro-Zone and the threat of trade stresses under a second Trump Presidency, will undermine the Euro and support GBP/EUR.

MUFG commented; “With yields in the UK set to remain at relatively higher levels at least until early next year, the pound is set to remain attractive as a G10 carry currency.”

During the week, GBP/EUR strengthened to a November high close to 1.2040.

Rabobank commented; “GBP has found support in recent sessions in part due to market expectations that the pace of BoE rate cuts will be slower through 2025 than they would have been without the budget changes.”

The Bank of England cut interest rates by 25 basis points to 4.75% at the latest policy meeting which was in line with consensus forecasts.

There was an 8-1 vote for the decision with Mann dissenting and calling for no change.

The bank’s guidance was relatively cautious with Governor Bailey reiterating that rates should not decline too far or too quickly.

The bank also stated some reservations over the impact of the budget of inflation which could deter the BoE from cutting rates aggressively in 2025.

According to Danske Bank; “Overall, we think the communication today supports our call of a more gradual approach to the cutting cycle. We expect the next 25bp cut in February with the Bank Rate ending the year at 4.75% in 2024 and 3.25% in 2025.”

It added; “The guidance delivered yesterday highlights the more cautious approach of the BoE, which supports our case of a continued move lower in EUR/GBP. This is further amplified by UK economic outperformance and tight credit spreads.”

ING has shifted its near-term stance; “A December rate cut, we think, now looks unlikely. Previously we’d thought that the Bank would accelerate its cutting cycle beyond today, but uncertainty surrounding the budget’s impact has changed our mind on that.”

The bank still thinks that rate cuts will accelerate if there is a sustained decline in services-sector inflation.

It added; “Our view is that rate cuts will be cut at every meeting from February until rates reach 3.25% next autumn.”

The German coalition government collapsed during the week. The SPD and Green Party will continue as a minority administration in the short term with elections likely in the first quarter of 2025.

According to Rabobank; “Another fact that could keep EUR/GBP bias lower through 2025 is that Germany and France have plenty of issues of their own.”

Expectations of a policy shift could underpin the Euro in the medium term.

Deutsche Bank head of forex research George Saravelos commented; "The impact would run via the potential confidence effect boosts of a more stable government, and more importantly the direct economic effects of a potentially more pro-active fiscal stance."

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TAGS: Currency Predictions Pound Euro Forecasts