Pound to Euro Exchange Rate Forecast: Buy at 1.1495 say Rabobank

October 25, 2023 - Written by John Cameron

STORY LINK Pound to Euro Exchange Rate Forecast: Buy at 1.1495 say Rabobank

GBP/EUR: Recovery Triggered by Euro-Zone Recession Fears

The latest Euro-Zone and UK business confidence data has maintained a lack of confidence in the outlook for both areas.

There is, however, likely to be increased concerns that the ECB has already tightened too much, increasing recession fears and raising fresh speculation that the central bank will be forced into a U-turn and cut interest rates.

This speculation will tend to undermine the Euro, although the Pound is not well placed to benefit.

Rabobank notes vulnerability in the Euro-Zone economy and sees scope for selling EUR/GBP at the 0.8700 area (Buying GBP/EUR below 1.1495).

After the raft of UK and Euro-Zone data releases, GBP/EUR secured a net gain to just above the 1.1500 level from 1.1460 lows on Monday as the Euro lost ground.

The UK PMI manufacturing index recovered to 45.2 from 44.3 the previous month and above consensus forecasts of 44.7, although the sector has still been in contraction territory below 50.0 since August 2022.

The services-sector index declined marginally to 49.2 from 49.3, in line with market expectations, although this was a 9-month low.

There was a sharp decline in manufacturing output prices, but service providers raised prices at a faster rate on the month as companies looked to restore margins.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence commented; “Gloom about the outlook has intensified in the uncertain economic climate, boding ill for output in the coming months. A recession, albeit only mild at present, cannot be ruled out.

He also pointed out the increase in services-sector inflation and added; “Any upward inflation pressures due to higher oil prices will be a major concern, meaning it would be unlikely for policymakers to rule out the possibility of rates rising again later in the year.”

According to Ruth Gregory, deputy chief UK economist at Capital Economics; "This supports our view that a mild recession is underway and that the Bank of England has finished hiking interest rates."

Labour-market data had limited impact with changes in methodology increasing uncertainty over the outlook. According to Thomas Pugh, economist at accountants; "We doubt that the new statistics will prompt the (BoE) to resume its tightening cycle at its meeting next month."

The Euro-Zone PMI manufacturing index retreated to 43.0 from 43.4 with the services index retreating to 47.8 from 48.7, both readings below expectations.

The composite index dipped to the lowest level since November 2020.

Cyrus de la Rubia, chief economist at Hamburg Commercial Bank commented; "In the euro zone, things are moving from bad to worse.”

He added; "Service providers' hiring came almost to a standstill. Manufacturing companies are not just continuing to cut staff, they are ramping up job shedding plans."

Commerzbank expressed concerns over the services sector; “It has been clearly in recession territory for three months. The index for the manufacturing sector, at 43.0, also gives no hope of a turnaround.”

The bank added; “The ECB is likely to revise its economic outlook further downwards. A further increase in the key interest rate is thus becoming increasingly unlikely.”

Melanie Debono at Pantheon Macroeconomics added; "At the moment things are turning down so it is very likely all of us will be revising down our forecasts. There really isn't much going for the euro zone right now."

ING commented on the latest bank-lending survey; “Further weakening in economic activity, slowing inflation and declining bank lending all point to easing pressure on the ECB as policy is clearly having the desired effect.”

Importantly, it added; “The risk of doing too much therefore will feature more prominently in the ECB debate in the months ahead.”

ING expects narrow ranges will prevail in the short term given vulnerability in the UK and Euro-Zone; “We prefer EUR/GBP continuing to trade around the 0.8700 area.”

The ECB will still be determined to bring inflation back to target.

According to Jack Allen-Reynolds at Capital Economics; "Recent activity and inflation data have been weaker than expected, but this won't stop Christine Lagarde from sticking firmly to the 'higher-for-longer' narrative."

This may underpin the Euro initially, although the narrative will tend to change quickly if recession fears intensify.

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TAGS: Pound Euro Forecasts