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Pound to Euro Week Ahead Forecast: June BoE Rate Cut under Threat

May 26, 2024 - Written by John Cameron


Foreign exchange analysts at Credit Agricole expect the Pound to Euro exchange rate (GBP/EUR) will strengthen to 1.19 at the end of 2024.

ING in contrast is still backing a retreat to 1.1365.

GBP/EUR jumped to 3-month highs and tested key resistance at 1.1765 after the UK inflation data as markets priced out a June rate cut.

It failed to break this area and retreated to 1.1735.

NatWest expects resistance will be tough to breakdown; “GBP is already trading close to levels in €1.17s that have appeared to be difficult to sustain a break above in the past – and could once again limit the upside.”

Monetary policy will remain a key element for the Pound with fiscal policy also important, especially with a July General Election.

Opinion polls give a very strong lead for the Labour Party with expectations that they will secure a comfortable majority.

ING commented; “with the 2022 mini budget crisis still fresh in the nation's political memory, none of the major parties are promising a radical departure from existing economic policy. Both Labour and the Conservatives have emphasised that they’ll stick to the existing fiscal rules, overseen by the independent Office for Budget Responsibility.

Monetary policy will be dictated by the Bank of England.

The latest inflation data recorded a headline decline to 2.3% from 3.2% and the lowest reading since August 2011, but above consensus forecasts of 2.1%.

The core rate declined to 3.9% from 4.2%, but above expectations of 3.6%.

Services-sector inflation declined only marginally to 5.9% from 6.0%.

Following the data, the chances of a June rate cut dipped sharply.

ING commented; “stubborn services inflation figures released this week favour an August rate cut over June. Markets are pricing just a 9% chance of a cut next month.”

It added; “Still, don’t assume the Bank won’t move in June just because there’s an election coming. BoE independence is a well-established and respected principle among the major parties, and a rate cut has been telegraphed long before the election was called.”

The bank summarised; “We retain our view that EUR/GBP will grind higher as the BoE delivers 75bp of easing this year, which is more than markets are currently pricing.”

Credit Agricole considers that a Labour victory could be positive for the Pound with a more stable environment. It added; “Furthermore, some clients are hoping that a Labour government could pursue a policy of ‘gradual rapprochement’ with the EU and thus weaken the growth-negative impact of the post-Brexit trade barriers. This could help boost domestic investment & spending and support the UK’s economic outlook & thus the appeal of GBP-denominated assets.”

Scotiabank took a similar view; “A Labour government should not worry investors unduly—how much worse than the last four years could it be, after all? Stability and the prospect perhaps of some “rapprochement” with the EU, or at least a reset of relations, would be a plus.

Socgen noted the higher than expected inflation data makes a June rate cut less likely, but added; the chances are that the BoE will start cutting rates after the ECB but over time, cut by more given the lack of room to ease fiscal policy.”

The latest Euro-Zone data continued to suggest a gradual rebound in the economy and wages growth was stronger than expected.

Despite improving data, there are still very strong expectations that there will be a June rate cut.

NatWest’s Neil Parker commented; “The decision of the European Central Bank Governing Council meeting looks to a very high probability to be an interest rate cut, and I can’t see much due for release prior to the meeting that could blow that outcome off course.”

Danske Bank has adjusted its medium-term ECB forecast; “We have revised our ECB rate path for the first time in more than 12 months and now expect the ECB to deliver two rate cuts this year (June and December), and three cuts next year. This will bring the deposit rate at 2.75% by the end of 2025.”
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