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Pound to Euro Week Ahead Forecast: "Risks Skewed to Downside" say Analysts

May 19, 2024 - Written by John Cameron


Foreign exchange (FX) analysts at ING and Danske Bank expect the Pound to Euro exchange rate (GBP/EUR) will weaken to 1.1365 at the end of 2024.

Nordea expects GBP/EUR will strengthen to 1.1765 on a 3-month view before a retreat to 1.1630 at the end of 2024.

The interest rate debate remained a key element and inflation data in the week ahead is likely to be crucial.

GBP/EUR secured a significant net advance to 10-day highs around 1.1670 during the week.

UK labour-market data was mixed with an increase in the unemployment rate to an 8-month high of 4.3% from 4.2% and the number of people on payrolls continued to decline.

Wages data was slightly stronger than expected with headline annual growth remaining at 5.7% and compared with expectations of a decline to 5.4%.

There will be a sharp decline in the headline rate from 3.2% previously due to favourable base effects and the April decline in retail energy prices.

Deutsche Bank commented; “We expect UK headline CPI to drop to just around 2.2% y-o-y, with core CPI at 3.6% y-o-y. Services CPI, we think, will drop to 5.4% y-o-y. Risks to our headline CPI projection are skewed to the downside, given potential weakness in both food and core goods inflation in April.”

ING commented; “We think Governor Andrew Bailey would like to join two fellow MPC members in voting for a cut, but is struggling to convince the majority. A June rate cut is now priced with a 60% probability (entirely possible) but our slight preference is for August. The key piece of data determining the timing of the cut will be April services CPI on 22 May.”

The German ZEW economic sentiment index strengthened further to 47.1 for May from 42.9 previously. This was above consensus forecasts of 44.9 and the strongest reading since February 2022.

The data maintained increased confidence in the Euro-Zone outlook.

There are still very strong expectations that the ECB will cut interest rates in June.

The debate now tends to focus on the outlook beyond June and whether there will be a second cut in quick succession.

ECB council member Schnabel signalled that she would not back a second cut in July.

MUFG commented; “Waiting until September aligns with the updated forecasts from the ECB and will give the ECB time to assess the strength and sustainability of the current economic upturn.”

Nordea added; “a more cautious start to the rate cuts has merits compared to back-to-back rate cuts, which would create expectations of a faster fall in interest rates.”

According to ING; “We look for sterling underperformance from here as the BoE cycle is priced closer to the ECB than to the Fed. We continue to like the chances of a move higher in EUR/GBP as markets may increase their bets on a June rate cut.”

Danske Bank commented; “We think the recent dovish shift in both the vote split, wording of the statement and downward revision to the inflation forecast increases the likelihood of our call of a June cut materialising. We expect 25bp cuts in the following quarters, totalling 75bp of cuts for 2024. Markets are pricing 60bp for the remainder of the year with the first 25bp cut fully priced by August. On balance, we continue to see relative rates as a positive for EUR/GBP.

Danske added; “The UK runs a large current-account deficit, which makes GBP vulnerable when capital inflows fade; this keeps GBP at risk vs EUR in the wake of a risk sell-off.”

According to RBC; “any deterioration in policy credibility will leave GBP vulnerable. As a result, the incoming government’s ability to fight the very negative impulse that the UK faces next year based on current plans will be constrained.”

RBC added; “we view the risks skewed to the downside for GBP as long as UK’s imbalances continue to require persistent capital inflows and the UK resumes running ‘triple’ deficits.”
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