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Pound to Euro Week Ahead Forecast: Retreat to 1.17, Fundamental Debate Continues

April 14, 2024 - Written by John Cameron


RBC Capital Markets forecasts that the Pound to Euro exchange rate (GBP/EUR) will weaken to 1.1365 at the end of 2024, with UK fundamentals still fragile.

In contrast, MUFG sees scope for further GBP/EUR gains, at least in the short term, due to a dovish ECB policy.

GBP/EUR posted gains to 1.1725 after the ECB policy decision before a retreat to 1.1700.

Interest rate expectations have been a key element during the week.

Expectations of a near-term Bank of England rate cut have faded this week. Hawkish commentary from MPC member Greene was a factor as she stated that a rate cut was still a long way off.

The shift in Federal Reserve expectations also triggered doubts about whether a near-term BoE cut was realistic.

The ECB held interest rates at 4.50% at the latest policy meeting, in line with consensus forecasts.

The bank also signalled the potential for a near-term rate cut with markets assuming that there will be a move at the June meeting.

Danske Bank is still cautious beyond June; “we continue to like our ECB rate call of a 25bp rate cut call in June, followed by further 25bp rate cuts once per quarter through the end of 2025. That said, and zooming into 2024, we see risks skewed to less than three rate cuts this year, due to the sticky domestic inflation.”

MUFG has adjusted its forecast profile again; “with scope for dollar appreciation now, pound appreciation is set to be more evident versus the euro.”

The bank added; “We had previously recommended short EUR/GBP as a possible trade idea but EUR/GBP has been stuck in a very narrow trading range. A break stronger now for the US dollar and the clear signal of a rate cut in June by the ECB could now open up a greater move to the downside in EUR/GBP.” (Gains for GBP/EUR)

UK GDP data recorded 0.1% growth for February with a slide in construction output offset by an upward revision for January. The economy also posted a slight advance in the 3 months to February.

According to the NIESR; “We forecast GDP to grow by 0.4 per cent in the first quarter of 2024. Our early forecast for the second quarter of this year sees GDP growing by 0.3 per cent.”

It added; “While exiting from the shallow recession in the second half of 2023 is welcoming, these forecasts remain broadly consistent with the longer-term trend of low, but stable economic growth in the United Kingdom.”

RBC expects fiscal policy will eventually be an important negative for the economy and currency. It notes; “On current plans, the UK is set to experience a very negative fiscal impulse next year. While an incoming Labour govt may look to soften that, its room to act is constrained by markets.”

ING expects a gradual rebound in the economy; “The bottom line is that we’re likely to see growth rates remain positive throughout 2024 and potentially gain momentum into the second half of this year. We shouldn’t expect fireworks though, and we don’t think the growth outlook is going to have much bearing on the timing of the first Bank of England rate cut.

The bank narrowly favours an August rate cut over June.”

ING still expects GBP/EUR will slide to below 1.15 at the end of the year as rate cuts accelerate late in the year.

Rabobank commented; "They [BoE]are laying the groundwork for a summer move, whether that be June or August. It does seem likely that we will have something.”

Credit Agricole is still relatively cautious over the UK outlook; “it would take evidence that UK consumers resumed spending supported by still tight labour markets and subsiding cost-push inflation to encourage investors to reassess their relatively more dovish BoE stance in a boost to the GBP.”
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