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The Pound to Euro: Forecast to Weaken, but Fall "Will be Slow" says Socgen

November 16, 2023 - Written by David Woodsmith


UK Inflation Data Cements BoE Rate-Cut Expectations, GBP/EUR Slides to 6-Month Lows

The Pound to Euro (GBP/EUR) exchange rate has slipped to fresh 6-month lows just below 1.1410 before a recovery to 1.1425.

Pound Sterling lost ground following Wednesday’s inflation data and has been unable to regain territory in European trading on Thursday.

The sharp decline in inflation for October has reinforced strong expectations that the Bank of England (BoE) will not increase interest rates further.

Indeed, the narrative has switched to when the BoE will cut interest rates.

Money markets are pricing in a 25 basis-point rate cut by the middle of 2024 and a further two rate cuts by the end of 2024 which would take rates down to 4.25%.

Bank of England MPC member Greene maintained a hawkish policy stance on Thursday and continued to promote the higher for longer narrative, but the Pound struggled to regain territory.

According to Greene; "There are reasons to think that the economy may be structurally a little bit different. That suggests we might need to stay restrictive for longer.”

Commenting on the inflation data she noted; "I would put all of this in the category of good news, but I think there are still reasons to worry about the persistence of inflation in the UK."

She added; “We will need to see the labor market loosen more to see incredibly high wage growth come down.”

Greene voted for a rate hike at the November meeting and there will be speculation that she will do so again in December.

There will, however, also be expectations that a majority of the committee will not back rate hikes, especially with more encouraging inflation data.

Commerzbank is still wary over inflation trends; “We would still be cautious for now. One data surprise does not mean the all-clear has been given, and given the surprisingly stubborn UK inflation so far, there is certainly a risk that the return to the inflation target will be bumpy. Tuesday's much stronger-than-expected wage data also supports this view.”

RSM UK economist Thomas Pugh also expects inflation will be stubborn; “The second half of the journey down inflation mountain will be tougher. Inflation probably won’t get back to something starting with a two before the second half of next year, and will require interest rates to remain in restrictive territory for a while yet.”

He does not expect interest rates will be cut until the third quarter of 2023.

Goldman Sachs, however, considers that rates could be cut in the first quarter of 2023.

The global stance on interest rates will also be a key element for the Pound and ECB policy will be a key element for EUR/GBP.

If the ECB maintains a tight policy, the Pound will tend to be more vulnerable while early rate cuts would underpin the Pound.

There will be important concerns over the Euro-Zone economy.

According to ING; "It seems that not much has to happen to push the eurozone into recession."

Nevertheless, it adds; "But that doesn't mean that the ECB is in a hurry to cut rates. We don't expect any rate cuts before the summer of 2024."

In the latest Reuters poll a majority expect the ECB will hold rates at current levels until the third quarter of 2024.

Socgen expects yield spreads will move against the Pound; “We expect the BoE’s MPC to cut rates by 1% more than the ECB, whereas the market prices the gap between the two to remain constant.”

It adds; “GBP will weaken, though everyone is so bearish already that the rise in EUR/GBP will be slow.”

ING also considers that market positioning will limit further near-term pound selling. It noted; “Quite a lot of BoE easing is already priced in for next year, however, meaning it is not certain EUR/GBP has to trade up to 0.8800 just yet. (1.1365 for GBP/EUR).

It still expects further losses to 1.1110 at the end of 2024.
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