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Pound to Euro 2024-2025 Forecast: Major Slide 1.15 to 1.06 say RBC

March 17, 2024 - Written by John Cameron


Foreign exchange analysts at RBC Capital Markets expect to see a Pound Sterling retreat to 1.15 at the end of 2024 and forecasts a major slide to 1.06 at the end of 2025.

BNP Paribas, however, expects that the Pound to Euro exchange rate (GBP/EUR) will strengthen to 1.21 at the end of 2024 and hold the gains until the end of 2025.

According to BNP there is scope for optimism surrounding UK fundamentals; “Our analysis indicates that the GBP’s external vulnerability is less acute than suggested by the UK’s large negative net international investment position and persistently wide current account deficit. In addition, front-end UK yields are among the highest in the G10 bloc, providing a carry buffer.”

BNP added; “Moreover, opinion polls suggest that the Labour Party will win a large majority at the upcoming UK general election, which would usher in a period of greater certainty regarding the UK’s political backdrop, benefitting the GBP.”

The Bank of England policy stance will inevitably be a key element with the latest policy decision in the week ahead.

There will be no change in interest rates with forward guidance a key element.

Investment banks are split on the potential BoE stance.

HSBC sees scope for a dovish shift; “The BoE has been clearly focused on labour market tightness as a upside risk to inflation and a reason to maintain a modestly hawkish tone. With that source of concern potentially fading, there may be room for some dovish developments at the 21 March meeting. An example of this would be if one of the prior two votes for a hike switched to an unchanged vote, for example.”

It added; “We favour playing GBP weakness against the EUR as the cross has been finding a base around a long-term support level at 0.8500, providing a clear exit point if the pair moves lower.”

It suggests selling GBP/EUR on approach to 1.1765.

SocGen also recommends selling GBP/EUR on approach to 1.1765.

Credit Agricole maintains a cautious stance on the Pound; “in our view it would take a fairly hawkish MPC message next week to encourage the UK rate markets to reassess their current rate outlook and thus give the GBP rate appeal a sorely needed boost.”

It added; “In the absence of that, however, the gap between the GBP and its rate spread vs the rest of the G10 currencies would remain a reason to be cautious on the GBP near-term outlook.”

Nomura expects the UK growth potential is weaker with inflation quickly bubbling higher again which will force the BoE to maintain a restrictive stance.

The bank added; “It’s one reason why we think the Bank of England will be cautious, waiting until August to cut rates, and why there are risks to it doing less than the 125bp of cuts we expect.”

Rob Wood at Pantheon Macroeconomics commented; "A key hurdle to them beginning to cut rates will be the April minimum wage increase.”

He added; “The recovery in growth and a recovery in the housing market suggests interest rates might not be quite as restrictive as the Bank has been assuming which means they might have a little less room to ease."

There will be a Pound impact if the BoE maintains a hawkish stance.

RBC commented; “GBP may benefit from decent carry in the near-term.”

It still sees scope for a dovish shift in BoE pricing and added; “This leaves GBP vulnerable to a deterioration in UK economic data. Hence, we are left with a relatively flat profile for EUR/GBP.”

RBC also expects budget pressures will build; “UK fiscal backdrop is still constrained, amid a tight spending profile and rising demand for public services, and any deterioration in policy credibility will leave GBP vulnerable. We have EUR/GBP moving higher next year, but this is more about expectations for a EUR/USD rally than a strong negative GBP view vs EUR.”

As far as the Euro is concerned, markets remained convinced that the ECB will cut interest rates by June with the possibility of an April move.

There has, however, been speculation over a faster pace of rate cuts in the second half of 2024.

According to ING; “some dovish comments by European Central Bank officials have hardly given markets a reason to hang on to the euro.”
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