Pound to Euro Forecast: Heading for 1.1235, say Danske Bank

November 1, 2023 - Written by John Cameron

STORY LINK Pound to Euro Forecast: Heading for 1.1235, say Danske Bank

According to Danske Bank, the Pound Sterling (GBP) is forecast to hit 1.1235 against the Euro (EUR) in the coming year.

“We continue to forecast EUR/GBP to move modestly higher the coming year to 0.89 [1.1235 for GBP/EUR] on the UK economy performing relatively worse than the euro area," said the currency analysts.

In contrast, Rabobank considers that that weakness in the Euro area will be more important. According to the bank; “latest economic data show that the Eurozone economy, and specifically Germany, has continued to sour.

Consequently, we expect EUR/GBP to edge back towards the 0.86 area in the weeks ahead". [1.1630 for GBP/EUR].

After hitting a 5-month low at 1.1440 on Tuesday, GBP/EUR recovered to 1.1510 on Wednesday.

The latest UK housing data provided an element of relief, but the overall data slate has remained generally negative for the UK and Euro-Zone.

Nationwide reported an increase in house prices of 0.9% for October after a 0.1% increase the previous month and compared with consensus forecasts of a 0.3% decline.

There was an annual decline of 3.3% after a 5.3% decline in the year to September.

Nationwide Chief Economist Robert Gardner commented that activity is very subdued with affordability still stretched and mortgage rates are well above the lows prevailing in 2021.

According to Gardner; “Activity and house prices are likely to remain subdued in the coming quarters. Despite signs that cost-of-living pressures are easing, with the rate of inflation now running below the rate of average earnings growth, consumer confidence remains weak and surveyors continue to report subdued levels of new buyer enquiries.”

The UK PMI manufacturing index was revised slightly lower to 44.8 from the flash reading of 45.2.

Although the main activity index was up from 44.3 in September, the output component contracted for an eighth consecutive month, the longest such run since the global financial crisis of 2008-09.

The final Euro-Zone data will be released on Thursday and the overall data flow has remained generally negative.

Euro area GDP is estimated to have contracted 0.1% after a downwardly-revised 0.1% increase the previous quarter.

Rob Dobson, Director at S&P Global Market Intelligence, commented; “The UK manufacturing downturn continued at the start of the final quarter of the year, meaning the factory sector remains a weight dragging on an economy already skirting with recession."

He added; "Risks to the outlook remain skewed to the downside. Business optimism dipped to a ten-month low and manufacturers' increased belt-tightening drove cuts to employment, purchasing and inventories. "Although both input prices and output charges fell in October, this brighter inflation outlook comes at the cost of increased recession risk, being a symptom of the broader weak demand malaise.”

According to HSBC; “a UK insolvency specialist released a report showing a 25% QoQ increase in the number of UK companies in “critical” distress, notably in construction.”

Nicholas Rees, FX market analyst at Monex commented that the housing data provided a slight boost to the Pound.

He added; "Even so, this likely overstates the improvement in the UK property market conditions given the slowdown in activity as marginal would-be mortgage borrowers are squeezed out of the market.

There are strong expectations that the Bank of England will hold interest rates at 5.25% at Thursday’s policy meeting.

According to RBC Capital Markets; "since the last MPR (monetary policy rate) in August, the data has largely supported the decision to hold, pointing to a loosening in the labour market (from what we can tell), slowdown in economic activity and easing inflation."

Danske Bank is in line with the large majority and expects the Bank of England will hold rates at 5.25%. It adds; “In our base case of an unchanged decision, we expect a muted reaction in EUR/GBP but on balance see risks as tilted to the topside. We anticipate the press conference to reiterate the MPC's current guidance emphasising the "higher for longer" narrative and the data dependent approach.”

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TAGS: Pound Euro Forecasts