Pound to Euro Forecast: 1.1495 in Next Six Months

December 21, 2023 - Written by David Woodsmith

STORY LINK Pound to Euro Forecast: 1.1495 in Next Six Months

GBP/EUR Exchange Rate Posts Fresh December Lows Amid On-Going Shift in Bank of England Expectations

The Pound overall has drifted lower in global markets over the past 24 hours, although ranges have been relatively narrow.

The Pound to Euro (GBP/EUR) exchange rate was unable to regain losses on Wednesday and retreated to fresh December lows close to 1.1520 on Thursday before consolidating around 1.1535.

Yield trends will remain crucial and Nordea forecasts GBP/EUR at 1.1495 on a 6-month view.

The lower-than-expected UK inflation data for November has continued to undermine the currency amid increased expectations of a less hawkish Bank of England policy stance.

There has been a further shift in money markets with traders pricing in a 50% chance that rates will be cut in March with a cut fully priced in for May.

Risk appetite also dipped overnight following the late sell-off on Wall Street and this also hampered the UK currency in global markets.

Position adjustment will also be a key element.

OCBC currency strategist Christopher Wong noted the importance of seasonal factors; "Liquidity is getting thinner as we get closer to the festive season, thin liquidity can exacerbate price movements on any data surprises."

In this context, he added; "Some adjustments in positions and paring back of risks ahead of (this) event is only sensible."

Domestically, the Lloyds Bank business barometer weakened to 35% for December from 42% the previous month.

This was the sharpest monthly decline since August 2022 and maintained the very erratic run for this series over the past few months.

The latest survey showed hiring intentions cooled but the proportion of companies planning to raise salaries rose. Pricing expectations fell for the first time since July which will provide some relief for the Bank of England.

Paul Gordon, a managing director at Lloyds Bank, said the economic outlook “remains tough”.

Hann-Ju Ho, senior economist at the bank added; "Businesses are also balancing cost pressures with a challenging labour market that will see increases to minimum wage in April 2024 at a time when they are managing staff retention and recruitment decisions,"

Vassili Serebriakov, foreign exchange and macro strategist at UBS noted; "A number of banks have seen pricing for (interest rate) cuts being front loaded. I think Bank of England was just a little bit behind because the inflation is higher, but it's now starting to move in the same direction."

He added; "Also, the pound has had a good run in the past couple of weeks, I think it's just reversing some of those moves."

Following the latest UK inflation data, there has been a further adjustment in expectations surrounding Bank of England interest rates.

Goldman Sachs, for example, has brought forward its forecast of the first rate cut to May from June previously.

MUFG quoted a Bloomberg report that it was the largest downside surprise for the annual rate of headline inflation since the release in March 2021, and the largest downside surprise for the annual rate of core inflation since the release in September.

According to MUFG; “It had previously been thought that persistent inflation risks were greater in the UK and would continue to make the BoE relatively more cautious over cutting rates. However, there is building evidence now that inflation in the UK is also coming down quickly like in the US and euro-zone with a lag.”

As far as the Euro is concerned, Nordea expects that the ECB will resist a dovish shift in the short term.

It noted; “Rate cuts are currently priced faster than what central banks have in mind and key figures would have to weaken somewhat to prompt rate cuts already in March or April and weaken quite a lot to get six rate cuts during 2024.”

If the ECB continues to resist rate cuts, the Euro will tend to gain near-term support, although this will be dependent on the Euro-Zone economy avoiding further deterioration.

Nordea does, however, expect ECB rate cuts to gather pace later in 2024.

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TAGS: Pound Euro Forecasts