Pound to Euro Forecast: 1.1765 in Six Months say Rabobank

November 29, 2023 - Written by Toni Johnson

STORY LINK Pound to Euro Forecast: 1.1765 in Six Months say Rabobank

The Pound-to-Euro exchange rate (GBP/EUR) held a firm tone on Wednesday as the Bank of England (BoE) maintained hawkish rhetoric while weaker-than-expected inflation data from two Euro-Zone countries increased expectations of 2024 ECB rate cuts.

In this environment, the British Pound advanced to 6-week highs against the Euro at 1.1570 before a slight correction to 1.1560.

Rabobank expects rate expectations will be crucial for GBP/EUR moves over the next few months.

According to the bank; “We continue to expect the exchange rate to be draw to the 0.86 level on a 1-to-3-month view and see scope for dips toward 0.85 on a 6-month view on the expectation that rate cuts from the BoE over the coming cycle will lag those from the ECB.”

This would equate to 1.1765 for GBP/EUR.”

Rhetoric from BoE officials has remained generally hawkish this week.

Deputy Governor Ramsden stated; “We think that monetary policy is likely to need to be restrictive for an extended period of time. And we've communicated that it will need to be sufficiently restrictive for sufficiently long to get inflation back to the 2% target.”

External member Haskel pointed to tightness in the labour market and difficulties in matching labour demand with supply.

He added; “Rates will have to be held higher and longer than many seem to be expecting."

BoE Governor Bailey made no further comments on monetary policy in comments on Wednesday.

Kamal Sharma, G10 FX strategist at Bank of America noted; "The Bank of England has been at pains to stress to markets that UK rate pricing for cuts in 2024 is misplaced. The message finally appears to be resonating."

Danske Bank analyst Kirstine Kundby-Nielsen noted the significance of fiscal policy; "The Autumn Statement had some inflationary measures."

She added; "Some of the more hawkish commentary from the Bank of England has definitely added to the narrative that inflation will be more sticky."

UK data on Wednesday was slightly stronger than expected with mortgage approvals increasing to near 47,400 for October from an upwardly-revised 43,700 the previous month.

The data increased hopes that the housing sector would prove to be resilient amid hopes of peak interest rates.

As far as the Euro-Zone is concerned, the latest inflation data has been weaker than expected.

On Wednesday, Spain reported that the headline inflation rate declined to 3.2% from 3.7% and below consensus forecasts of 3.5%.

The German inflation rate also declined to 3.2% from 3.8% and below market expectations of 3.5%.

Weaker than expected data from the two countries has increased expectations that the Euro-Zone data on Thursday will also come in below forecasts.

Consensus forecasts are for the headline rate to decline to 2.7% from 2.9% with the core rate at 3.9% from 4.2%.

Lower inflation will reinforce expectations that the ECB will cut interest rates earlier than expected and this will tend to sap Euro support.

German 2-year yields have declined to 4-month lows.

ING commented; “With a weakening economic outlook and disinflation, rate hikes should be off the table at the December meeting. Given that the full impact of the tightening so far will still unfold in the coming months, the risk is even high that the ECB has already tightened too much.”

In this environment, it will be very difficult to stop the juggernaut of market rate-cut expectations.

There are still reservations surrounding the UK economy which is likely to limit Pound buying

According to BofA's Sharma "Whilst encouraging, we note that expectations around UK data have been weak, and whilst the recent flow has been encouraging, the macro outlook will likely remain poor in 2024."

Nevertheless, he added; "High inflation and anaemic growth do not provide the basis for a strong currency, but for now, the rebound in data surprises has provided the catalyst for the back-up in UK yields."

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TAGS: Currency Predictions Pound Euro Forecasts