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Pound to Euro Week Ahead Forecast: FX Bank Views Roundup

December 3, 2023 - Written by David Woodsmith


Foreign exchange analysts at Rabobank see scope for the Pound to Euro exchange rate (GBP/EUR) to strengthen to 1.1765 on a 6-month view.

In contrast, Bank of America does not expect GBP/EUR to strengthen further with a rate of 1.1495 in mid 2024 and 1.1365 at the end of next year.

The Pound to Euro (GBP/EUR) exchange rate has posted sharp gains this week amid the combination of hawkish Bank of England rhetoric and a slide in Euro interest rate expectations.

The Euro-Zone PMI manufacturing index was revised to 44.2 from the flash reading of 43.8.

HSBC was not impressed by the data; “It is small comfort that things are getting worse less quickly than before when the details of the survey offer no path to a material bounce back in activity.”

The headline Euro-Zone inflation rate declined sharply to 2.4% from 3.2% previously. This was below consensus forecasts of 2.7% and the lowest reading for over two years.

The core rate also declined to 3.6% from 4.2% which was below expectations of 3.9% and the lowest reading since May 2022.

Bundesbank head Nagel attempted to keep the hawkish flame intact.

According to Nagel, the central bank is not yet satisfied with the recent inflation developments.

He added that longer-term inflation expectations continue to be significantly above the 2% target and further rate hikes remain a possibility as inflation risks are still on the upside.

The rhetoric overall had little impact and markets have now priced in rate cuts of 100 basis points by the end of 2024.

This shift in expectations was crucial in undermining the Euro.

Simon Harvey, head of FX analysis at Monex Europe noted the risk that policy is too tight and has already induced a recession.

He added; "The ECB should begin to ease policy as soon as April 2024, with risks that a more sinister downturn in growth could warrant a rate cut as soon as March."

There have been limited UK data releases during the week with the latest CBI survey suggesting that retail sales growth was still weak in November and that only a limited recovery was expected for the key month of December.

In contrast, the latest Lloyds Bank business confidence survey strengthened to 42 for November from 39 the previous month and the highest reading since February 2022.

Hann-Ju Ho, senior economist at Lloyds Bank Commercial Banking, commented; “Business confidence rising to a 21-month high shows the resilience of UK companies, as both trading prospects and economic optimism continue to rise.”

According to the survey, a record share of companies are planning price increases, especially with companies looking to restore profit margins.

Bank of England rhetoric has remained broadly hawkish during the week with further warnings that interest rates will need to stay high for a prolonged period.

Governor Bailey continued to warn that there was no scope for near-term interest rate cuts.

MPC member Greene commented on Thursday that the natural rate of interest rates may now be higher. She added; "These shifts suggest policy may have to be restrictive for an extended period of time in order return inflation to 2% over the medium-term."

In this context, she added; “doing too little was a bigger risk than doing too much, although she did admit that the situation was no more finely balanced.

Bank of America (BoA) continues to see limits to Pound gains; “we continue to emphasise that high for longer UK rates is likely to exacerbate the downside risks to an already weak economy. In this context, higher for longer UK rates is for bad reasons, not good ones.”

It adds; “GBP will continue to trade at a discount to historical averages on signs that the UK economy remains stuck in its structural malaise of weak growth and high inflation.”

BoA summarises; “This combination is not usually a healthy backdrop for FX outperformance.”

MUFG noted the big shift in market pricing; “The market is now priced for the BoE to cut by 25bps in August next year which is later than both the ECB and the Fed.

It added; “EUR/GBP has dropped through its 50-day, 100-day and 200-day moving averages in the last five trading days and risks are skewed to the downside for now.”

According to the bank; “The shift in thinking on the ECB given the recent evidence of faster declines in inflation does leave EUR/GBP open to further falls as a divergence in inflation and therefore policy expectations widens further.”

Rabobank expects monetary policy trends will be crucial for EUR/GBP; “We continue to expect the exchange rate to be draw to the 0.86 level on a 1-to-3-month view and see scope for dips toward 0.85 on a 6-month view on the expectation that rate cuts from the BoE over the coming cycle will lag those from the ECB.”
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