Pound to Euro Rate: Forecast at 1.1765 in Three Months say Natwest

November 5, 2023 - Written by John Cameron

STORY LINK Pound to Euro Rate: Forecast at 1.1765 in Three Months say Natwest

GBP/EUR Exchange Rate: Economic Performance to Dominate

Foreign exchange analysts at NatWest take a positive on the outlook for the Pound Sterling (GBP) against the Euro (EUR) and see scope for the British currency to strengthen to 1.1765 on a 3-month view.

According to Danske Bank, however, the Pound-to-Euro exchange rate will weaken to 1.1235 during 2024.

Danske Bank analysts expect that the relative performance of the Euro area will be the key driver for the Pound performance against the Euro.

It adds; “On balance, we continue to see relative rates as a moderate positive for EUR/GBP with room for further cuts being priced in for 2024.”

NatWest considers that the Pound will be driven by the traditional metrics of growth and yields. In contrast to Danske, it adds; “Nominal yields to provide support for Sterling against the Euro.”

There is a consensus that both the UK and Euro-Zone fundamentals will be fragile, limiting the scope for GBP/EUR moves.

GBP/EUR rallied strongly to 1.1525 on Friday from lows around 1.1470 as risk appetite strengthened.

The Bank of England held interest rates at 5.25% at Thursday’s policy meeting, in line with consensus forecasts.

Bank Governor Bailey stated that it was much too early to think about rate cuts and there were comments that rates would have to stay high for some time, although he also stated that the bank should not keep monetary policy restrictive for excessively long.

According to Unicredit “In our view, the BoE is highly unlikely to hike rates again in this cycle. Headline inflation will fall rapidly in October, the BoE forecasts a drop from 6.7% to 4.8% due to a base effect and lower household energy prices.”

The bank expects further declines in inflation as pipeline pressures subside It also considers that economic activity is weak with the PMI manufacturing and services indices remaining in contraction territory for the last three months.

Unicredit adds; “with the economy likely to enter a recession in the coming quarters, and inflation clearly moving down towards 2% next year, we expect 75bp of rate cuts in total for 2H24, a faster pace of rate cuts than the market is expecting.”

ING expects the BoE will push back against market expectations; “Clearly, the BoE is trying to prevent the premature easing of financial conditions which would be inconsistent with policy still threatening a further hike.”

Overall, it expects market expectations will eventually win out; “it looks like the next nine months will be a game of cat and mouse as investors push for rate cuts and the BoE fights back. We think data will probably support investors and see upside risks to our year-end EUR/GBP forecast of 0.8700.” (1.1495 for GBP/EUR).

MUFG also notes that markets are assuming that interest rates have peaked and adds; “We concur with that view and see scope for the 2024 rate cut pricing to extend further.”

The bank notes that markets also see less scope for rate cuts than elsewhere, especially with stronger upward pressure on wages that in the US and Europe.

Nevertheless, it added; “we see the inflation data improving notably and softer labour demand will help ease wage growth. By Q1 next year the market will expect much more easing and hence in the meantime, GBP is set to underperform.”

There will be important stresses if inflation does not co-operate.

Althea Spinozzi, senior fixed income strategist at Saxo Bank noted the risk that UK inflation forecasts have to be revised higher again.

She added; "The risk the BoE is running into is that, if at the next projections there is the need to revise inflation up again, that will need to be brought together with another interest rate hike. That would kill the central bank's credibility at the cost of sterling."

Samuel Zief, Head of Global FX Strategy at JP Morgan considers that all major central banks are now on hold with markets focussing on relative fundamentals.

He sees scope for weaker European currencies; “At the same time, growth and inflation – particularly in Europe – are both moving in the same direction: lower. That’s a strong backdrop for fixed income; we like owning European bonds across the curve and funding tactical FX trades out of euro and sterling."

According to TD Securities; “Looking at market expectations of cuts over next year, it seems like there is still more optimism on the UK economy vs. the Euro area, whereas we expect the BoE to lead the global cutting cycle amongst peers. Accordingly, we see some EUR/GBP upside as markets keep moderating hawkish expectations for the UK.”

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TAGS: Pound Euro Forecasts