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Pound to Euro Forecast: Scope to Rise to 1.1765 say ANZ

October 12, 2023 - Written by John Cameron

Foreign exchange strategists at ANZ maintain a positive stance on the Pound to Euro (GBP/EUR) exchange rate, primarily due to expectations that the Euro-Zone will underperform the UK with heightened recession risks.

It sees scope for GBP/EUR to strengthen to 1.1765.

In contrast, MUFG expects that GBP/EUR will weaken to 1.1235 on a 12-month view amid UK economic weakness and a further erosion of Bank of England interest rate expectations.

The Pound to Euro (GBP/EUR) exchange rate has generally held within a 1.1500-1.1600 range during the past three weeks and traded at 1.1580 on Thursday.

There have, however, been warnings that moves will become sharper.

This week, for example, volatility for sterling options that expire in one month's time spiked to the highest since July.

Implied volatility - a measure of how traders price an option - jumped to a high of 8.56% and, significantly, these options expire after the November 2nd Bank of England's next policy meeting.

UK and Euro-Zone data releases will be metrics ahead of the next policy meetings.

UK GDP increased 0.2% for August, in line with expectations, while the July data was revised to show a contraction of 0.6% from 0.5% in the flash report.

The services sector recorded 0.4% growth, although output in consumer-facing services declined a further 0.6% after a 0.2% retreat for August.

Industrial production and construction declined 0.7% and 0.5% respectively.

Capital Economics deputy chief economist Ruth Gregory still expects that the UK economy will dip into recession; “Some of the strength of GDP in August was due to temporary factors and the timelier survey measures of activity point to a drop in real GDP in September. So we are sticking to our below-consensus forecast that the economy will shrink by 0.2% q/q in both Q3 and Q4.”

The latest data suggests that the labour market is weakening.

The October Recruitment and Employment Confederation (REC) and KPMG survey recorded a slight decline in vacancies, the first overall decline since February 2021.

Demand for temporary staff also declined to a 4-month low.

There was also evidence that wage pressures were easing with the increases in starting salaries and temporary wages slowing to 30 and 31-month lows respectively.

Claire Warnes, partner at KPMG, commented; "Employers are clearly nervous due to the long-term economic uncertainty and budget constraints that are impacting businesses everywhere. This in turn is leading to a continued reliance on temporary staff."

REC chief executive Neil Carberry was more positive over the outlook; "Employers tell us they are feeling better about themselves as the year moves on, and today's data does suggest the possibility of a turnaround in hiring over the next few months."

MUFG voiced concerns over the outlook; “The monthly GDP report for August is unlikely on its own to trigger a further significant adjustment to their current forecast for weak growth, but risks are currently skewed to an even weaker Q3 GDP print.”

The bank added; “Weak growth alongside building evidence of slowing inflation in the UK supports our view that the BoE is unlikely to raise rates further this year with the policy rate peaking at 5.25%.”

There is still scope for limited expectations of a rate hike to be priced out.

DailyFX notes that speculators are now running short Sterling positions and expects that the markets will respond to positive data; “any signs that UK growth is improving could prompt speculative positioning to be reassessed.”

Westpac expects a responsible fiscal policy will help underpin Pound confidence; “The takeaway for markets is that the year-long run into the election is likely to be about prudent economic alternatives rather than fractious ideology. That should stabilise views on UK and provide a base under GBP.”

ANZ focusses on the potential Euro-Zone recession for the second half of 2023 and expects weakness will undermine the Euro.

Westpac added; “Eurozone recession risks continue to rise.”

ING sees scope for near-term GBP/EUR gains; “the euro remains rather unattractive compared to the higher-yielding pound, and the decline in EUR/GBP may have more room to go from current levels. A move below 0.8600 in the near term is possible.” (1.1630+ for GBP/EUR).
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