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Pound to Euro Forecast: 1.1235 in 12 Month Outlook, say Danske

November 19, 2023 - Written by John Cameron


Danske Bank forecasts the British Pound to weaken to 1.1235 against the US Dollar in a year, with JP Morgan expecting the GBP/EUR rate to remain at 1.1500 by September 2024.

Market expectations of BoE rate cuts, following lower UK inflation and retail data, have led to a bearish view on the Pound.

The BoE is anticipated to cut rates by mid-2024, despite Deputy Governor Ramsden's suggestion of maintaining high rates.

The Autumn Statement could provide limited support for the Pound, while Germany's constitutional court ruling poses a budgetary challenge, impacting growth prospects.

Danske Bank analysts expect the Pound Sterling (GBP) to weaken to 1.1235 against the US Dollar (USD) over the next 12 months.

Investment Banks, overall, are relatively bearish on the Pound Sterling, although JP Morgan expects the Pound to Euro exchange rate will hold at 1.1500 by September 2024.

GBP/EUR dipped to 6-month lows below 1.1410 during the week and was sitting on support on Friday as markets scaled up expectations of rate cuts after inflation and retail sales data.

MUFG noted the impact of the shift in UK rate expectations; "The dovish repricing of BoE policy expectations has contributed to the pound underperforming modestly over the past week. It has resulted in EUR/GBP climbing to a fresh high yesterday of 0.8766 as it moves further above support from the 200-day moving average at around 0.8685." (1.1510 for GBP/EUR).

Inflation developments have tended to dominate markets during the week.

The headline UK inflation rate declined sharply to 4.6% from 6.7% previously and below consensus forecasts of 4.7%.

The core rate also declined to 5.7% from 6.1% and below expectations of 5.8%.

The sharp decline in headline inflation was driven primarily by retail energy prices, especially as the jump in prices for October 2022 came out of the annual calculation.

The data, however, was still important in driving increased market confidence that a further Bank of England (BoE) rate hike was very unlikely and that the central bank would cut rates next year.

Commerzbank FX analyst Michael Pfister commented; "If there are no new upside inflation surprises in the coming months, the Bank of England is unlikely to raise interest rates again."

According to Danske Bank; “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.”

The BoE last raised rates in August to 5.25% and held rates steady at the subsequent two meetings.

Money market traders are now much more confident that UK rates have peaked, with the timing of rate cuts brought forward after Wednesday's inflation data.

Markets have now priced in a 25 basis-point rate cut by June and are expecting two further rate cuts by the end of 2024.

Stronger expectations of rate cuts were crucial in sapping Pound support over the second half of the week.

Bank of England Deputy Governor Ramsden effectively rejected market pricing due to supply-side difficulties and considers that rates will have to stay at elevated levels.

He noted; "Our tight labour market is based on much more subdued growth in demand and very little growth in supply, and that does have consequences for monetary policy.

Markets, however, took little notice of Ramsden’s rhetoric or hawkish comments from MPC member Greene.

The Pound has, however, secured limited protection from expectations that the ECB will also cut rates much earlier than expected.

According to ING “We expect 75bp of European Central Bank (ECB) easing in 2024 starting in the third quarter, but clearly the risk is that the ECB eases earlier.”

TD Securities Looking at market expectations of cuts over the next year, there is still more optimism on the UK 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 UK expectations.

The Autumn statement will be released in the week ahead with reports that the government will look to cut business and inheritance taxes.

RBC Capital Markets expects only limited measures; "Our working assumption ahead of the Autumn Statement is that any potential major pre-election announcements will be held back until the 2024 Budget in March."

ING considers the potential for some Pound support; “Looser fiscal policy at a time of restrictive monetary policy in the first half of 2024 would help the pound.”

This week, the German constitutional Court ruled that the government could not transfer unused emergency pandemic funds of EUR60bn to fund green initiatives and industrial support.

Yesenn El-Radhi, a vice president at ratings agency DBRS Morningstar commented; "The court's decision brings a budgetary dilemma, forcing the government to choose between slashing climate spending or finding new sources of financing."

According to ING; "For 2024, it will hardly have an impact on growth but for the following years the EUR60 bn euro hole will make structural changes harder and hence increases the likelihood of a longer stagnation."
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