Pound to Euro Forecast: "Potential for EUR to slip vs. GBP" say Rabobank

January 18, 2024 - Written by John Cameron

STORY LINK Pound to Euro Forecast: "Potential for EUR to slip vs. GBP" say Rabobank

Bank of England Rate-Cut Expectations Scaled Back, GBP/EUR Exchange Rate Strengthens to 5-Week High

The Pound has maintained a firm tone during the past 24 hours with markets continuing to react to the latest inflation data.

The Pound to Euro (GBP/EUR) exchange rate strengthened to 5-week highs just above 1.1670 before settling around 1.1655 in Europe on Thursday and some Sterling bears are having second thoughts

ING commented; “it looks like we will probably have to cut our EUR/GBP forecasts soon. Our current forecasts of a move up to 0.88 later this quarter (1.1365 for GBP/EUR) and 0.90 later this year (1.1110 for GBP/EUR) look too aggressive.

The stronger than expected UK inflation rate of 4.0% for December compared with expectations of 3.8% triggered renewed doubts whether the Bank of England would be in a position to sanction an early cut in interest rates.

Markets now consider that there is only a 50% chance of a May rate hike from 80% at the start of the week.

Traders are also now pricing in four rate cuts by the end of 2024 from five previously and this is a key element underpinning the Pound.

ING noted; “Investors took about 20bp out of the 2024 Bank of England easing cycle yesterday. That move supported sterling across the board.”

Secondary data released overnight also helped underpin Pound sentiment in global markets.

The RICS' house price balance, measuring the gap between the percentage of surveyors seeing rises and falls in house prices, improved to -30 for December from -41 in November.

This was stronger than consensus forecasts of -34 and equalled the highest reading for 13 months.

Other indicators were also more positive with the new buyer enquiries strengthening to -3 from -13 and the strongest reading since April 2022.

The measure of agreed sales also hit the highest level since March 2022 at -6.

RICS senior economist Tarrant Parsons commented; "Supported by an easing in mortgage interest rates of late, buyer demand has now stabilised, and this is expected to translate into a slight recovery in residential sales volumes over the coming months."

He added; "The lending climate is set to remain restrictive compared to much of the post-global financial crisis era next year, meaning any uplift in activity is likely to be limited for the time being."

The UK will release the latest retail sales data on Friday and this will represent a significant snapshot of demand conditions within the economy.

Consensus forecasts are for a 0.5% monthly decline after a 1.3% decline for November.

A stronger-than-expected reading would maintain the more positive stance towards the economy.

In contrast, a sharp decline would reinforce fears that the UK was in recession at the end of 2023.

As far as the Euro-Zone is concerned, there has been further mixed rhetoric from ECB officials.

In comments on Wednesday, President Lagarde stated that the bank would not have the data from collective wage negotiations until late Spring and this data would be crucial in determining whether interest rates could be cut.

Nevertheless, she also suggested that rates would be cut in the Summer.

The ECB could cut ahead of the BoE.

The ECB will hold its next policy meeting next week with very strong expectations that there will be no change in rates.

Any guidance from the bank will be watched closely.

According to ING; “the most likely outcome of next week’s ECB meeting will be to stress data dependency and to give some insights into potential conditions for a rate cut, without pre-committing to anything.”

Rabobank maintains a negative stance towards the Euro. It commented; “we are concerned that the relative buoyancy of the EUR belies sour growth fundamentals in the Eurozone and specifically in Germany. We see scope for the EUR to lose ground against the USD in the coming months. Additionally, we see potential for the EUR to slip vs. the GBP and against both the SEK and the NOK.

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TAGS: Pound Euro Forecasts