Pound to Euro Week Ahead Forecast: Euro-Zone Concerns to Support Sterling

December 17, 2023 - Written by Tim Boyer

STORY LINK Pound to Euro Week Ahead Forecast: Euro-Zone Concerns to Support Sterling

Foreign exchange analysts at Danske Bank expect the Euro (EUR) to gradually grind higher against Pound Sterling (GBP).

They expect the Pound to Euro (GBP/EUR) exchange rate to weaken to 1.1235 over 2024.

In contrast, Rabobank now sees scope for GBP/EUR gains to 1.1900 on a 9-12-month view.

A key issue will be whether tight monetary policy is sustainable and whether markets believe that the stances are credible.

The Bank of England (BoE) and ECB both held interest rates unchanged at the latest policy meetings at 5.25% and 4.50% respectively.

There was a 6-3 vote for the BoE with three members again voting for a further increase in rates.

Both banks continued to warn over inflation and that it was premature to talk about cuts in interest rates.

There were also warnings from the BoE that it was much too early to be considering interest rate cuts, especially as inflation risks were still biased to the upside.

According to Governor Bailey; "Successive rate rises have helped bring inflation down from over 10% in January to 4.6% in October. But there is still some way to go. We'll take the decisions necessary to get inflation all the way back to 2%.”

ING noted; “BoE ladles thin gruel to the doves.”

ECB President Lagarde commented "We don't think that it's time to lower our guard. There is still work to be done that can very much take the form of holding (rates)."

MUFG noted; “President Lagarde confirmed there was no discussions at all about rate cuts. The justification it appears was that there was no evidence of a “sustainable slowdown” in inflation. That suggests to us the scope for a shift in the new year if there was further evidence by then of a continued slowdown in inflation.”

Danske expects the BoE will have to ease policy; “Overall, we expect the UK economy to show further signs of weakness, inflation to level off and wage growth to have peaked as shown by recent data releases. Coupled with global momentum and more rate cuts being priced in for peers, we expect this to spill over to the BoE pricing.”

It added; “Overall, we see relative rates as a negative for GBP and see the recent rebound as attractive levels to sell GBP. We continue to forecast EUR/GBP to move modestly higher the coming year to 0.89.”

The UK PMI manufacturing index retreated to 46.4 for December from 47.2 and below consensus forecasts of 47.2.

The services-sector index, however, strengthened to 52.7 from 50.9 previously which was above market expectations of 51.0 and the highest reading for six months.

The latest data cast fresh doubts over the ECB policy stance.

According to flash data for December, the German manufacturing PMI index edged higher to 43.1 from 42.6 previously, but slightly below consensus forecasts while the services-sector index retreated to 48.4 from 49.6 previously.

Both French readings deteriorated on the month and below market expectations.

The Euro-Zone PMI manufacturing index was unchanged at 44.2 for December and slightly below consensus forecasts of 44.5.

The services-sector index retreated to a 2-month low of 48.1 from 48.7 and below expectations of 49.0.

According to the survey, average selling prices rose at an increased rate, posting the largest monthly increase since May to remain high by the historical standards of the survey.

Rabobank noted; “Earlier this month we revised up our forecasts for GBP against the USD and the EUR on the back of the consistently hawkish commentary from the BoE and economic weakness in Germany. We see EUR/GBP at 0.84 on a 9-to-12-month view.”

MUFG expects Euro-Zone concerns will help support the Pound; “We doubt that lack of divergence today will be maintained and see the BoE caution as far more justified and warranted. It suggests scope for GBP outperformance and we see downside risks to EUR/GBP from here.”

It added; “A move back to the year-to-date low (0.8493) and below looks a more plausible scenario to us over the coming months.” (1.1775 for GBP/EUR).

According to Credit Agricole; “any lack of material improvement in today’s Eurozone flash PMIs for December could somewhat curtail the relative optimism embedded in the ECB and EUR.”

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TAGS: Pound Euro Forecasts