Pound to Euro Rate: Tipped to 1.1630 on Break Above 1.1550, say ING

November 27, 2023 - Written by Ben Hughes

STORY LINK Pound to Euro Rate: Tipped to 1.1630 on Break Above 1.1550, say ING

The Pound to Euro exchange rate (GBP/EUR) has made headway on Monday and posted a 3-week high just above the 1.1540 level.

Marke expectations surrounding potential Bank of England (BoE) rate cuts have been scaled back slightly in absolute terms and compared with the ECB which has underpinned the Pound.

There is still an important element of scepticism over the medium-term outlook.

The UK CBI retail sales survey improved to –11 for November from –36 in October and compared with consensus forecasts of –30.

It was still the seventh consecutive monthly negative reading for sales and a small decline in expected for December.

On a 3-month view, retailers are more optimistic over the outlook with a positive balance of 4 expecting conditions will improve, the second highest reading in two years.

CBI Principal Economist Martin Sartorius was still cautious over the outlook; "Though sentiment has picked up slightly, firms do not feel that a revival in activity is imminent."

He added; "As the festive period approaches, the retail sector remains in a perilous position. Sales volumes have been falling year-on-year for six months in a row, as cost-of-living concerns and higher interest rates weigh on consumer spending.”

Overall confidence in the UK outlook has shifted and ING considers that a potential divergence in fiscal policy will help underpin the Pound.

The bank notes; “the UK government plans to put £20bn to work in the economy, while countries like Germany remain hamstrung by its constitutional court.”

Fiscal policy has had an impact on interest rate expectations.

ING notes; “These developments have left investors looking for just 40-50bp of Bank of England (BoE) easing next year – clearly less than what is expected of the Fed or of the ECB.”

MUFG also notes that markets now expect that a first UK rate cut will be delivered in September rather than June expected before the Autumn Statement.

According to ING, a break above 1.1550 for GBP/EUR could lead to gains to 1.1585 or even 1.1630.

MUFG notes that the Pound performance is correlated strongly with trends in global equities and the recovery in risk conditions has helped underpin the currency this month.

This improvement in sentiment has been triggered to an important extent by hopes that global interest rates have peaked.

MUFG also notes that business confidence data was slightly stronger than expected for November.

Tax cuts were announced in the Autumn Statement and markets are assuming that there will be further cuts announced in the Spring budget.

A less restrictive fiscal policy will underpin growth and lessen the potential for interest rate cuts.

MUFG is still sceptical over the overall Pound outlook.

It adds; “However, we remain sceptical that the recent upward adjustment for UK rates will be sustained. We expect weak growth and slowing inflation in the coming quarters to encourage market participants to price back in more BoE rate cuts.

MUFG also notes that the OBR growth forecasts were weak and added; “In these circumstances, the GBP could strengthen further in the near-term against EUR and USD, but the gains are built on shaky foundations.”

On Monday, Prime Minister Sunak was keen to trumpet inward investment projects into the UK and announced net projects worth close to £30bn.

Deutsche Bank was still very cautious over the investment outlook.

The bank calculates that net FDI is running at -3.5% of GDP in the fourth quarter, the second worst among major economies, and compared with a 10-year average of 1.7%.

According to Deutsche; "Relative to trends over the past two decades, the UK has shifted from a sizable net recipient of FDI to a net exporter. There is now some persistence to the net FDI deficit over the last three years and weaker FDI project numbers since 2017, that will add to concerns that they relate to Brexit."

Given that the UK runs a current account deficit, net FDI outflows would have important negative implications for the currency.

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TAGS: Daily Currency Updates Pound Euro Forecasts