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Pound to Euro Week Ahead Forecast: 1.17 Holds, 1.1365-1.1905 This Year

February 18, 2024 - Written by Tim Boyer


Danske Bank analysts expect that the Pound to Euro exchange rate (GBP/EUR) will weaken to 1.1365 on a 6-12 month view.

In contrast, Credit Agricole expects that GBP/EUR will strengthen to 1.1905 at the end of 2024.

GBP/EUR briefly touched 1.1765 during the week, but failed to break this key resistance level and retreated to below 1.1700 to trade with a net loss to 1.1680.

The UK and Euro-Zone outlooks, together with Bank of England and ECB policy stances, will be crucial for GBP/EUR.

Danske Bank still considers that the Euro area can out-perform the UK; “At present, we do not see the global investment environment to create meaningful divergence between EUR and GBP. However, we expect the UK economy to perform relatively worse than the euro area and expect relative growth outlooks and broad central bank pricing to weigh on GBP.”

UK data during the week painted a notably mixed picture. There was a slowdown in wages growth, but the increase was still above market expectations and too high for comfort for the Bank of England while the inflation data was slightly weaker than expected with the headline rate holding at 4.0%.

GDP data confirmed technical recession for the second half of 2023, but there was a stronger than expected rebound in retail sales for January.

Berenberg examines the UK economic conditions. It notes; “So far, the BoE has managed to pull off a mostly soft landing for the economy, while enabling a Goldilocks scenario for the labour market. But it is too soon to declare a complete victory.”

It added; “Even though money market rates have fallen in anticipation of forthcoming rate cuts, past rate hikes are still feeding through the housing market and to businesses that are rolling over debt. To keep the labour market on track and to underpin a broader recovery in economic activity in 2024, the BoE will need to start to take its foot off the brake soon.”

According to Berenberg; “A likely further easing of wage growth over coming months should give BoE policymakers the confidence to start cutting rates from Q2 onwards. We continue to look for the first 25bp cut in June and five cuts overall in 2024 – lowering the bank rate from 5.25% to 4% by year-end.”

Deutsche Bank asked; “Where to from here? We expect growth to move sideways in Q1-24, before improving over the remainder of the year. Easier fiscal and monetary policy, alongside improving supply dynamics will likely see the UK economy expand a little faster from spring onwards. We still see 2024 GDP expanding by 0.3%, with risks skewed to the upside.

The BoE has to deal with very mixed data.

HSBC noted; “As ever, the data can be spliced in different ways. BoE hawks will point to the higher than expected wage growth outcomes, and the drop in the unemployment rate to 3.8%, well below the BoE’s equilibrium 4.5% suggestion. Doves will cite the ongoing deceleration in wages growth and the falling number of vacancies, and rising redundancies. As our economists note, it is small wonder that the MPC is split three-ways in its policy voting.”

According to BNP Paribas; “While our central case is for the first BoE rate cut to come in June, later than our expectation for the ECB and the US Federal Reserve, we think the balance of risks are skewed to an earlier start to cuts limiting the degree to which BoE policy supports the pound.”

It added; “Finally, the UK’s current account deficit and negative broad basic balance of payments leave the currency vulnerable to weakness.”

Nomura expects the BoE will hold firm; “Will a technical recession spook the BoE? WE don’t think so. Its focus is clearly on indicators of inflation persistence, notably wage growth and services inflation.”

It also pointed to evidence of improving growth conditions.

Nomura added; “Activity surveys like the PMIs have been especially strong recently, suggesting further strength ahead in the services sector which would only add concerns to the BoE over the potential for services inflation.”

Credit Agricole sees scope for Pound support; “The near-term outlook for the GBP should remain a function of the currency’s relative rate appeal and the resilience of risk sentiment. We would expect that both would be broadly supportive.”

There have been no major Euro-Zone developments during the week with a net improvement in German business confidence offset by further evidence of dismal current conditions.

According to HSBC; “any rebound in the German economy is likely to be shallow, in our view. After all, we think that a broader decline in competitiveness, partly due to higher energy prices and rising unit labour costs, rather than high interest rates that are holding it back.”

Credit Agricole did note the potential for A Euro rebound; “The EUR outlook could improve if the Eurozone data corroborates that the worst of the economic downturn is behind us.”
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