May 12, 2024 - Written by John Cameron
STORY LINK Pound to Euro Week Ahead Forecast: Closer to a Rate Cut
Foreign exchange analysts at ING and MUFG expect that the Pound to Euro exchange rate (GBP/EUR) will weaken to 1.1495 by mid-year as the Bank of England (BoE) cuts interest rates.
According to ING; “we think sterling is on the verge of independent weakness. At some point over the next couple of months, we think the Bank of England will make it clear that it does have room to cut rates and sterling will fall. We can see EUR/GBP climbing to the 0.87 area later this quarter.” (1.1495 for GBP/EUR).
In contrast, Bank of America expects GBP/EUR will strengthen to 1.19 by the end of 2024.
The BoE policy decision was the main event during the week.
The central bank held interest rates at 5.25%, in line with the strong consensus forecast.
As far as the vote split is concerned, there was a 7-2 vote for the decision with Deputy Governor Ramsden joining Dhingra in voting to cut rates.
There was a net downgrading of inflation forecasts and a small upward revision to growth projections.
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Governor Bailey remained optimistic over economic trends and does expect that interest rates will be cut over the next few months.
He did, however, add that more evidence of a sustainable decline inflation was needed before a cut could be sanctioned.
The vote split illustrated divisions within the overall committee, but there are also contrasting views within the majority.
According to the minutes; “There was also a range of views about the extent of the evidence that was likely to be needed to warrant a change in Bank Rate.”
MUFG commented; “Our sense now with Bailey appearing sympathetic to a cut, is that Huw Pill, Ben Broadbent and Sarah Breeden will be the three key members in determining when a shift to cutting will take place.”
Following the meeting, markets priced in just above a 50% chance of a June rate cut.
MUFG commented; “The market pricing ahead of the meeting was for just over two rate cuts so this comment indicates a reasonable belief of at least three rate cuts by the MPC – given there are five meetings including the June meeting, cutting by more than twice is very plausible.”
The latest UK GDP data recorded 0.4% growth for March compared with expectations of 0.1%.
First-quarter growth was reported at 0.6% compared with expectations of 0.4% and the UK, therefore, moved out of recession.
MUFG commented; “there was a lack of conviction evident in market pricing given the MPC caution in moving toward a rate cut. That will be more the case now this morning after the UK GDP data came in a lot stronger than expected.”
On the economy, Bank of America commented; “The recent data flows has been positive, particularly from the service sector – the dominant driver for UK growth.”
It added; “This is important in that it shows that the UK still has positive macro momentum which in our view supports the broader outlook and inflation in particular. Though the UK labour market is showing some signs of easing, wage pressures remain robust.”
The bank expects that this will have implications for interest rates.
According to BoA; “The BoE may need to await concrete signs of a slowdown – which may be delayed due to various stimulus measures – before it can be sure that a slowing economy will translate into weaker inflation. A marathon, not a sprint.”
Bank of America expects also carry trades will remain a key driver in currency markets.
According to the bank; “Carry is the pipework that drives the cyclical outperformance of GBP particularly versus the low yielding currencies. Structural issues remain medium-term concerns but for now, cyclical factors matter more as central banks move back to a more conventional policy setting.”
BoA added; “We still look for outperformance versus the funders – JPY, CHF and EUR.”
There are very strong expectations that the ECB will cut interest rates in June.
BoA expects the BoE will be reluctant to cut ahead of the ECB. It added; “with the BoE making clear that they are not mechanically tied to either the ECB or the Fed, it would be strange for the BoE landing zone to be in June, the precise time we expect the ECB to cut rates.”
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TAGS: Pound Euro Forecasts