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GBP/EUR: MUFG Lowers Pound to Euro Forecast Gains to 1.2085

March 26, 2024 - Written by John Cameron


The Pound to Euro exchange rate (GBP/EUR) dipped to 2-month lows at 1.1625 on Friday before a limited recovery to 1.1655 on Monday.

The shift in interest rate expectations has been a key element for exchange rates with last week’s Bank of England policy decision considered generally dovish with markets considering a stronger potential for an early interest rate cut.

Rate expectations will remain a key element for Pound moves.

MUFG has shifted its position on the Bank of England (BoE) and Pound following last week’s policy meeting.

It now expects that the BoE will cut rates in June compared with expectations of August previously.

The bank added; “The comments suggest that a rate cut from the BoE can’t be ruled out as early as at the next MPC meeting in May if there is a significant downward revision to the inflation forecasts.”

Given its change in BoE expectations, it has also adjusted its Pound forecast.

Crucially, it had expected the BoE to cut rates after the ECB, but it is now much less convinced that this will be the case.

According to the bank; “In light of the dovish comments from Governor Bailey in recent days, it is much less likely now that the BoE will lag behind the ECB and Fed when beginning to cut rates.

It added; “After outperforming at the start of this year on the back of expectations that the BoE will lag behind the ECB and Fed when beginning to cut rates, this week’s dovish BoE policy guidance could now trigger a correction lower for the GBP in the coming months.”

MUFG has, therefore, dropped its forecast of GBP/EUR gains to 1.2085.

According to Danske Bank; “we stress that the recent dovish shift in both the vote split, wording of the statement and remarks from Governor Bailey opens the door for a cut already in May.”

Danske added; “Additionally, 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.”

The bank has a 12-month GBP/EUR forecast of 1.1240.

ECB rhetoric on interest rates will continue to be watched closely.

Over the weekend, Bundesbank head Nagel commented; "The probability is increasing that we will see the first rate cut before the summer break. If I would put it into probabilities, definitely something in June has a higher probability than in April."

Markets and not expecting an April move and very confident that a first rate cut will be delivered in June.

ING added; “we doubt that changes much this week given the absence of key data.”

ING expects UK developments will have a greater impact and added; “That dovish turn from the BoE helps cement the 0.8500 floor for EUR/GBP – which now can work its way slowly towards the 0.87 area over coming month.

This equates to further GBP/EUR resistance at 1.1765 and a gradual retreat towards 1.1500.

COT data, released by the CFTC recorded a sharp decline in long, non-commercial Pound positions to just over 53,000 contracts in the latest week from a 16-year high of over 70,000 the previous week.

The decline in long positions will lessen the risk of further aggressive position adjustment and Pound selling.

There was also a sharp decline in long Euro positions to near 48,000 from over 74,000 the previous week. This was the smallest long Euro position since October 2022.

Overall, this shift in positioning will limit the scope for further aggressive Euro selling in global markets.

Socgen looks at the EUR/GBP technical outlook; “It has crossed above the upper limit denoting potential upside. The move has so far remained contained near 200-DMA at 0.8610 which is also a multi-month trend line.

This equates to 1.1615 for GBP/EUR.

It also sees scope for a further significant retreat if this level breaks.
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