Pound to Euro Week Ahead Forecast: Downside Risks to Medium-Term Outlook

November 17, 2024 - Written by Frank Davies

STORY LINK Pound to Euro Week Ahead Forecast: Downside Risks to Medium-Term Outlook

The global backdrop is likely to have a major influence on the Pound to Euro (GBP/EUR) exchange rate.

RBC Capital Markets has made sharp revisions to its forecasts in the latest update as it expects the Euro to come under sustained pressure following Trump’s election win.

It added; “EUR remains cheap relative to its long-run average, but there still seems to be good reason for that and it does not prevent further cheapening.”

Given Euro vulnerability, the bank now expects that GBP/EUR will strengthen to 1.25 at the end of the first quarter of 2025.

RBC is still cautious over forecasting heavy and sustained Euro losses; “The Euro area still runs a sizeable current account surplus and there is good demand to buy EUR for hedging purposes when EUR-crosses are at the lows which acts as a natural brake on rapid losses.

It also expects GBP/EUR losses to 1.1765 at the end of 2025 given vulnerable underlying UK fundamentals.

During the week, GBP/EUR initially posted 31-month highs above 1.21 before dipping back below 1.20 on a Euro recovery while a weaker-than-expected UK GDP report undermined the Pound.

ING considers wider fundamentals will underpin the Pound; “There’s lots of focus on the more stable political backdrop in the UK than in Europe now – which can help UK policymaking. Let’s see whether larger government spending in 2025 helps GBP.”

The bank does, however, see risks from a more aggressive Bank of England (BoE) stance. The under-priced BoE easing cycle remains the key upside risk to EUR/GBP. Here, UK services inflation will still be closely watched.”

In the near term, US policies both actual and expected could be crucial.

The consensus is that policies under a Trump Administration will have a greater negative impact on the Euro than the Pound.

According to ING; “By nature of its small trade deficit with the US, the UK will not be in Trump’s crosshairs on trade. At the same time, the UK’s smaller dependence on trade than say the eurozone – and especially compared to Germany – suggests the UK could be a little more immune to global trade wars.”

MUFG expects tariffs will be imposed on Europe; “It will deliver a negative growth shock for the euro-zone economy which has been recovering this year from the negative energy price shock triggered by the start of the Ukraine conflict.”

ING expects economic vulnerability will lead to sharper ECB interest rate cuts; “Having been hesitant in cutting rates earlier this year, we now think the ECB will turn more aggressive – especially with Trump heading to the White House in January.”

ING added; “Our view remains that a 50bp move in December remains very much possible, and we expect a bearish impact on the euro given markets are pricing in just over 30bp.”

There is likely to be a confidence vote in the German parliament in December and elections in February.

There have been hopes that a new government could support the economy through fiscal policy.

RBC is doubtful this will be realised; “the debt brake is baked into the constitution and any ‘emergency’ measures are not likely to replicate US-style largesse.”

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TAGS: Pound Euro Forecasts