Pound to Euro Forecast: Decline to 1.1365 in Three Months say Danske

March 28, 2024 - Written by John Cameron

STORY LINK Pound to Euro Forecast: Decline to 1.1365 in Three Months say Danske

The Pound to Euro exchange rate (GBP/EUR) has remained in narrow ranges with the pair finding support just below 1.1650, but struggling to sustain any gains and settling below 1.1660.

Interest rate expectations will continue to be an important driver for exchange rates in general and GBP/EUR in particular.

Danske Bank still forecasts a GBP/EUR decline to 1.1365 on a 3-month view.

According to money markets there is a 20% chance the Bank of England (BoE) could deliver a quarter-point cut at its next meeting on May 9.

In contrast, the chances of an ECB rate cut in April is only around 5% while the chances of a Fed rate cut in May are around 13%.

In this context, rhetoric from BoE officials will continue to be watched closely.

In comments on Tuesday, BoE member Mann stated that there had been a softening in services-sector prices while a disconnect in the labour market would help soften wages while consumer discipline is constraining firms’ pricing power.

She did, however, add that the UK still has more persistent services inflation and stronger wage dynamics than the US or Euro-Zone.

In this context, she considers that markets are pricing in too many cuts.

According to Mann; "I think that there has been a substantial easing even since the vote last week, and I think that perhaps markets are a bit too complacent about how long they think the BoE overall, the MPC, will hold rates."

Nevertheless, HSBC commented; “the main takeaway is that the BoE’s ardent hawk is no longer quite so hawkish.”.

In this context, the bank expects little support for the Pound.

Deutsche Bank has a more positive stance on the currency; "Sterling's external vulnerabilities screen much lower now, helped in no small part by the fall in energy prices."

According to Bank of America, April is a sweet spot for the Pound on seasonal grounds.

XTB research director Kathleen Brooks also pointed to positive calendar effects; "Seasonality does play a part and partly that's to do with the tax year-end and people filling up their ISAs, so there's more investment, UK-wise."

In this context, she added; "Whilst the yield differential could be eroded, and that's definitely what's driven sterling in the last year, it could be in a way that is growth-positive, which could support the pound."

There are no significant data releases in the short term. The next batch of crucial UK labour-market and inflation data releases are not due until the third week of April.

The next GDP data will be released on April 12th.

According to Danske Bank; “We continue to expect the Bank of England (BoE) to prime markets for a rate cut at the May meeting which includes updated projections, delivering the first cut of 25bp in June. However, 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; “We think the dovish shift marks an important turning point for EUR/GBP with BoE at present not set to lag peers notably in an impending cutting cycle. 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.”

Risk conditions will also be a significant element for the Pound.

According to Nordea; “Overall, the focus on cuts from central banks should continue to provide support to the risk asset rally in the time to come.”

ECB rhetoric will continue to be watched closely. According to Council Member Cipollone; "Wage growth appears on track to gradually moderate in the medium term towards levels that are consistent with our inflation target and productivity growth, in line with the projections.

Markets remain very confident of an ECB rate cut by June at the latest.

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TAGS: Pound Euro Forecasts