Pound to Euro Week Ahead Forecast: Ranges 1.24 to 1.625 in 2024

April 1, 2024 - Written by John Cameron

STORY LINK Pound to Euro Week Ahead Forecast: Ranges 1.24 to 1.625 in 2024

Danske Bank forecasts that the Pound to Euro (GBP/EUR) exchange rate will weaken to 1.1240 on a 6-month view.

The consensus market view is that there will be limited net losses to 1.1625.

In contrast, Credit Agricole expects GBP/EUR will strengthen to 1.19 at the end of 2024.

GBP/EUR found support below 1.1650 during the week and posted a significant advance to just below 1.17.

Overall risk conditions will be important in the near term and the FTSE 100 index posted 12-month highs which will provide an element of near-term Pound support.

Bank of England and ECB interest rate policies will remain crucial over the next few months as a whole.

As far as the Bank of England (BoE) is concerned, MUFG notes that the probability of a June rate cut is around 50% with a 20% chance of a move in May.

It added; “There is still a strong belief that the BoE will need to see more evidence in the coming quarter showing core inflation and wage pressures continue to slow to give the BoE enough confidence to begin cutting rates.”

Danske Bank has consistently considered that UK inflation will decline sharply.

The headline UK inflation rate declined to 3.4% for February from 4.0% previously and there will be a sharp decline over the next two months, especially with retail energy prices declining in April.

In this context, Danske added; “The past month, data releases have overall pointed to more muted price and wage pressures in the UK. More broadly, large base effects from energy prices are set to bring headline inflation back to 2% during Q2 2024.”

Danske also expects the inflation decline will allow a second-quarter rate cut and weaken the Pound.

The bank added; “We continue to expect the Bank of England (BoE) to prime markets for a rate cut at the May meeting which includes updated projections, delivering the first cut of 25bp in June. However, we stress that the recent dovish shift in both the vote split, wording of the statement and remarks from Governor Bailey opens the door for a cut already in May.”

Danske considers that the March BoE meeting was a watershed event and commented; “We think the dovish shift marks an important turning point for EUR/GBP with BoE at present not set to lag peers notably in an impending cutting cycle.”

At least some MPC members will remain concerned over inflation and will be wary over cutting rates too soon.

Haskel, for example, stated that his decision to change his vote in March was due to improvements in critical indicators of inflation.

Headline inflation will decline further, but Haskel stated that underlying inflation is crucial for monetary policy.

In this context, he stated that a cut in interest rates is likely to be a long way off.

According to ING; “Our house call is that the BoE cuts rates four times starting in August – and the case for that will only build as services inflation falls noticeably through the second quarter.”

Markets will be continuing to monitor political risks and ING expects calm conditions; “We doubt the election will have a material impact on sterling since Labour is so far ahead in opinion polls – as it was in 1997.”

According to Credit Agricole; “GBP to benefit from converging outlook between the UK and the rest of G10 especially if a Labour election victory fuels hopes for a post-Brexit rapprochement with the EU.”

At this stage, markets are very confident that the ECB will cut interest rates in June. ING noted that markets are pricing in an 85% chance of a cut at that meeting.

Inflation trends developments will be important for the ECB.

According to SocGen; “we believe core is likely to remain stickier at around 2.5% throughout the year, with risks skewed to the upside.”

Higher core inflation would make the ECB more reluctant to cut rates.

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TAGS: Pound Euro Forecasts