December 4, 2023 - Written by Frank Davies
STORY LINK GBP/EUR Outlook: Pound to Euro Exchange Rate Posts 12-Week Best
The Pound to Euro exchange rate posted 12-week highs just above 1.1690 in Asia on Monday before consolidating just above 1.1650.
Market positioning and the shift in relative interest rate expectations has been a key element with the Pound drawing support from expectations of aggressive rate cuts next year.
There has already been in a shift in market expectations and investment banks have brought forward their expectations of a rate cut.
According to Goldman Sachs; “Following another downside inflation surprise, including very soft sequential core inflation, our economists now expect inflation close to target even on an annual basis within the next few months, and the ECB to deliver the first rate cut in Q2 next year.”
It also considers that there is still scope for a further shift in market expectations which will tend to undermine the Euro.
There has been further evidence of divisions within the ECB.
In comments over the weekend, Bundesbank head Nagel stated; "We have not yet won the fight against inflation."
He also stated that the next phase of bringing inflation down would be more difficult; "All in all, I expect inflation to carry on declining, but at a slower pace and with possible bumps along the way,"
According to Nagel; "Add in a scenario where an escalation of geopolitical tensions could imply higher inflation and it becomes clear that it would be way too early to declare victory over high inflation rates.”
ECB council member Villeroy stated that disinflation forces are even faster than expected and that there will be scope for rate cuts in 2024.
ING agrees on the importance of interest rate expectations, but expects a fresh reversal in market sentiment.
It notes; “Dovish commentary from the ECB has now seen investors pricing ECB rate cuts several months ahead of the Bank of England (BoE) next year and expectations build of a deeper easing cycle in the Eurozone than in the UK. We disagree with that pricing and think the BoE will deliver more hikes than the ECB next year.”
According to the bank; “This probably means that EUR/GBP does not need to spend too much time below 0.8600. (1.1630 for GBP/EUR).”
It adds; “Indeed, 0.8500 (1.1765 for GBP/EUR) represents very strong support and we remain happy with our forecasts of EUR/GBP edging up to the 0.88/0.90 area into next year.”
This would represent a slide to 1.1110- 1.1365 for GBP/EUR.
CFTC data recorded a sharp decline in short, non-commercial Sterling positions to just below 8,000 in the latest week from just above 26,000 the previous week.
The sharp decline in short positions will lessen the potential for further position adjustment and make it more difficult for the Pound to secure a further net advance.
Bank of America still expects that the UK economy will struggle with weak underlying fundamentals. It notes; “Whilst encouraging, we note that expectations around UK data have been weak, and whilst the recent flow has been encouraging, the macro outlook will likely remain poor in 2024.”
According to the bank; “High inflation, supply side constraints and anaemic growth do not provide the basis for a strong currency.”
It adds that it does not expects Sterling gains to be sustained; “Whilst we think that there is some justification to hold a tactical long in GBP, we ultimately view this as an opportunity to re-establish shorts in GBP.”
As far as the data is concerned, the Euro-Zone Sentix investor confidence index improved to -16.8 for December from -18.6 previously, but this was weaker than expectations of -15.0.
Sentix commented; “This is the best value since May 2023 and many economists see three increases in the expectation value as a sign of a trend reversal. So can we expect better economic news soon?
It adds; “The still weak overall momentum and the lack of a certain amount of international support speak against this.”
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TAGS: Pound Euro Forecasts