Pound to Euro Week Ahead Forecast: ECB and BoE Policies to Dominate

December 10, 2023 - Written by David Woodsmith

STORY LINK Pound to Euro Week Ahead Forecast: ECB and BoE Policies to Dominate

Danske Bank currency specialists expect the Pound to Euro exchange rate to slide to 1.1050 in 2024.

In contrast, Rabobank sees scope for limited net Pound Sterling gains against the Euro to 1.1765 on a six-month view.

After jumping at the end of last week, GBP/EUR posted 3-month gains to just below 1.1700, but was unable to make further headway and settled around 1.1660.

There has been a big shift in interest-rate pricing over the past few weeks.

Futures markets are now pricing in around 80 basis points of BoE rate cuts next year and 140 basis points of easing by the ECB.

The UK 10-year yield has declined 75 basis points over the past six weeks to a 7-month low below 4.00%.

In contrast, the German 10-year yield has declined 80 basis points and in relative terms yields have edged in favour of the Pound.

Immediate attention will now focus on the central bank meetings next week with the ECB and Bank of England both holding their last meetings of 2023.

There are very strong expectations that both will leave rates on hold at this meeting.

Overall forward guidance from the banks will be watched very closely and the BoE vote split will also be a key element.

Investment banks overall are not backing the market verdicts.

Bas van Geffen, senior macro strategist at Rabobank commented on the ECB; "We have pencilled in some rate cuts for next year but not as early nor as steep as markets are currently pricing.”

He added; “I'm currently still on September as the base case, but I do see risks that they could go in June or July instead."

He added; "I think it's really an inflation story, if the disinflation is a bit quicker, then it could be end of Q2, but I think March is quite a stretch."

ING considers that market pricing is overdone; “The question is to what extent it will align with the market's aggressive pricing for rate cuts in 2024. We suspect it will fall short of endorsing ultra-dovish expectations. There is some upside room for EUR rates and the battered euro.”

ING does, however, express concerns over the Euro-Zone economic outlook; “Needless to say, the lower the ECB's growth and inflation forecasts for 2024 and 2025, the higher the likelihood of rate cuts.”

Melanie Debono, senior Europe economist at Pantheon Macroeconomics does not expect the ECB will panic “The ECB has said in the past it knows its tightening cycle will hit growth. A recession of the magnitude we're expecting of just 0.1 decline in Q3 and Q4, it's not going to shake them to the core."

She forecasts GDP Growth of 0.6% next year and 1.4% in 2025.

According to Debono; "It's not very impressive, but it's not zeroes, so at the moment it's better than what we're seeing.”

There are very strong expectations that the Bank of England will keep interest rates at 5.25% until the third quarter of 2024 and will end the year at 4.50%.

According to HSBC, inflation will be sticky; "The indicators suggest that the economy is picking up, not slowing down. And history tells us that inflation does not just melt away, particularly when demand is as resilient as it still appears to be in the UK."

Deutsche Bank notes that the UK outlook is unimpressive; "Despite strong expectations of one, the UK has so far avoided a recession. We expect the economy to skirt one next year too. But sluggish growth remains likely, with the UK economy expected to expand by a meagre 0.3% in 2024, driven by weaker consumption, weaker trade, and weaker investment."

Weak growth will sap Pound support.

Danske Bank considers that BoE policy will be a lose-lose outcome for the Pound; “If inflation broadly declines in line with rest of peers (our base case), this would likely trigger markets to front-load rate cuts in line with our call, acting as a headwind for GBP.”

If, however, rates are to stay elevated for a prolonged period of time or the BoE is forced to trigger a sharper downturn in the economy to get inflation back to target, it expects this would be a negative for the GBP.

According to Danske; “Additionally, we expect the UK economy to perform worse than the euro area while challenged by the fiscal backdrop and continued concerns over debt sustainability.”

Rabobank is still cautious over the UK outlook; “Around a year ago, the BoE was warning about a 5 quarter UK recession beginning in the final quarter of last year. The good news is that this did not happen, the bad news is that the UK economy has still been heavily tainted by stagflation this year.”

Nevertheless, it expects the German outlook is even worse; “Looking ahead, we see scope for a little more outperformance of GBP vs. the EUR given that the UK’s weak economic position is being balanced by a poor situation for Germany.”

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TAGS: Pound Euro Forecasts