Pound to Euro Forecast: 1.1235 in Twelve Months, say Danske

October 29, 2023 - Written by Ben Hughes

STORY LINK Pound to Euro Forecast: 1.1235 in Twelve Months, say Danske

GBP/EUR Exchange Rate: Both Currencies Plagued by Weak Fundamentals

Foreign currency experts at Danske Bank expect that the Pound to Euro (GBP/EUR) exchange rate will weaken to 1.1235 on a 12-month view.

HSBC is bearish on the UK fundamentals, but considers that the Euro will perform even worse.

In this context, it expects GBP/EUR/support below 1.1500.

According to Danske; “Overall, we expect the UK economy to perform relatively worse than the euro area and the conclusion of the Bank of England hiking cycle to weigh on GBP.”

In contrast, HSBC commented on EUR/GBP; “we look for some downside as the recent push above 0.87 looked a little exaggerated compared to the move in yield differentials.” (GBP/EUR support below 1.1500).

The latest survey evidence has been generally weak with the CBI issuing notably downbeat reports on the industrial and retail sectors.

Overall confidence in the Euro-Zone economy also remains notably weak, although the German IFO business confidence index did recover slightly to 86.9 from 85.8 the previous month.

According to the IFO the economy; “can see a silver lining ahead.”

Markets expect the Bank of England and ECB will not increase interest rates further.

Uncertainty over labour-market developments will complicate the Bank of England policy stance.

The ONS used a new methodology for the latest data sets with a greater emphasis on online surveys and tax data rather than responses to surveys.

The BoE is certainly concerned over the data flows. Last month, for example, it cast doubts on the data stating that it was “difficult to reconcile with other indicators of pay growth”.

Investec economist Philip Shaw warned the latest data should be “taken with a huge pinch of salt bearing in mind that they are being compiled on a different basis”.

Shaw added: “The developments surrounding the unemployment and employment series mean that the MPC has lost another important set of figures to guide it in setting interest rates. Clearly the absence of key data on the labour market is unhelpful, especially at a time when ‘data dependency’ is the guiding principle.”

Martin Beck, chief economic adviser to the EY Item Club also considers that the BoE has little confidence in the data.

He added: “Uncertainty strengthens the case to hold, rather than fumbling in the dark.”

Global factors will also tend to deter near-term BoE action

According to NatWest Markets; "Recent geopolitical events will probably induce a modicum of monetary policy caution, reinforcing the likelihood of unaltered policy settings."

The ECB held interest rates at 4.50% following the latest policy meeting while bank President Lagarde stated that this was not the time for forward guidance.

The central bank stated that inflation is still expected to stay too high for too long and domestic price pressures remain strong.

Policy was, however, working as planned through monetary transmission with weaker demand helping to curb inflation pressures.

According to the statement, governing council decisions will ensure that policy rates will be set at sufficiently restrictive levels for as long as necessary.

According to Danske Bank; “We conclude that today’s meeting was more about stock-taking that than sending new policy signals.”

Commerzbank notes that markets are expecting rate cuts from the ECB before mid-2024 and this is undermining the Euro.

It notes; “For now, falling inflation pressure and the struggling Eurozone economy will seem to confirm the market’s view.

Commerzbank does not back this view, but admits that it will take time for sentiment to switch.

According to the bank; “It will take patience. How much patience? First of all, inflation developments have to seem very disappointing (from the ECB’s point of view); we haven’t got to that point yet. And we are not likely to reach that point next month either.”

In this context, it does not expect Euro gains until the first quarter of 2024.

HSBC suspects a strengthening bias for the Pound; “We look for GBP to outperform EUR given a recent divergence from rate differentials, but the currencies have similar personalities.”

It is still wary over the Pound given that the full impact of monetary tightening, but added; “Speculative community GBP selling has also eased and the market has moved back to a sizeable GBP short.”

Positioning should offer some Pound protection.

Wells Fargo has a lack of confidence in both the Euro and Pound. It notes the weak survey evidence and added; “The European Central Bank and Bank of England have also signalled that policy rates have likely reached their peak, thus lessening interest rate support for their respective currencies.”

It expects GBP/EUR to weaken to 1.1370.

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TAGS: Pound Euro Forecasts