Pound to Euro Rate Week Ahead Forecast: Another EUR Lurch Lower

November 24, 2024 - Written by David Woodsmith

STORY LINK Pound to Euro Rate Week Ahead Forecast: Another EUR Lurch Lower

Foreign exchange analysts at Commerzbank expect the Pound to Euro exchange rate (GBP/EUR) to maintain strength throughout 2025 with gains to 1.2350 at year-end. This would be the strongest level since 2016.

There is very little in the way of dissent on a short-term view while, after initial gains to at least 1.22, MUFG expects that there will be a net GBP/EUR retreat to 1.2050 in the third quarter of 2023.

The Euro-Zone PMI business confidence data was weaker than expected with a steeper rate of contraction in manufacturing while the services sector dipped into contraction.

Weaker than expected data late in the week triggered fresh expectations of an aggressive interest rate cut by the ECB at the December policy meeting. There was also further dovish talk from ECB officials and GBP/EUR advanced to around 1.2035.

MUFG commented; “The dovish comments support current market expectations for the ECB to lower rates for the third consecutive meeting in December, and to keep lowering rates towards 2.00% next year.”

Inflation could still disrupt the easing cycle. Some ECB speakers have appeared relatively relaxed over the level of wage settlements, but more hawkish members will be wary over a fresh threat to inflation.

MUFG added; “More persistent wage growth alongside a weaker euro and retaliatory EU tariffs are three potential upside risks to the inflation outlook that could make the ECB become more cautious over continuing to cut rates in the year ahead.”

The latest UK inflation data recorded an increase in the headline rate to 2.3% from 1.7% and slightly above consensus forecasts of 2.2% while the core rate edged higher to 3.3% from 3.2% and above expectations of 3.1%.

In testimony to the Treasury Select Committee, Bank of England (BoE) officials were generally cautious over the outlook for interest rates, especially given reservations over inflation trends.

In particular, there were concerns that the budget would increase unit wage costs and potentially put upward pressure on inflation.

Commerzbank expects stubborn core inflation and a relatively hawkish BoE stance; “As for the Bank of England's upcoming meeting in December, the figures suggest that a pause is now almost a foregone conclusion. Even the rate cut in February is being called into question.”

It added; “We still believe that the next rate cut will take place then. The argument in favour of this is that monetary policy is still likely to be seen as quite restrictive and policymakers will certainly want to avoid falling behind the curve. However, if the upcoming inflation figures also surprise on the upside, the discussions are likely to intensify.”

Danske Bank commented on the BoE; “Our base case of a continuous gradual easing cycle is further amplified by the expansionary fiscal measures presented by the government last month. We continue to expect the BoE to remain on hold in December and deliver the next 25bp cut in February.”

It added; “GBP continues to benefit from a cautiously hawkish tone from the BoE and UK growth outperformance relative to the Eurozone. We think these forces will continue to weigh on the cross also in the coming months. This is further amplified by continued tight credit spreads and a USD positive environment.”

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TAGS: Currency Predictions Pound Euro Forecasts