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Pound to Euro Week Ahead Forecast: 1.1240 - 1.2050 Ranges, Which is More Likely?

June 9, 2024 - Written by John Cameron


Foreign exchange strategists at SocGen forecast that the Pound to Euro exchange rate (GBP/EUR) will weaken to 1.1240 by the first quarter of 2025.

In contrast, Barclays expects GBP/EUR to strengthen to 1.2050 at year-end and hold this level at the end of next year.

The Euro was resilient after the ECB rate cut, but again tested key resistance around 1.1765 on Friday.

The ECB cut all interest rates by 25 basis points at the latest meeting with the refi rate lowered to 4.25% from 4.50%.

The ECB was still relatively cautious over the inflation outlook and suggested that there would not be another near-term cut, although Bank President Lagarde did not provide clear guidance on the outlook.

According to ING; “One rate cut in September and another one in December are the most likely outcomes. However, it wouldn't take a lot of negative inflation surprises for the ECB to tread more carefully or even reverse today’s cut.”

It added; “With today’s decision, the ECB has slightly loosened the monetary policy brakes. With more (inflation) roadblocks ahead, it’s clearly far too early to even think about taking the foot off the brakes entirely.”

MUFG commented; “the flow of data makes it much more likely that the ECB will skip cutting again at the July meeting. If the flow of data continues in the same vein, it is highly likely that the markets will reduce further the total amounts of cuts priced for 2024 as a whole. We now see greater risks of the ECB not delivering the three rate cuts we assume.”

HSBC noted relatively hawkish rhetoric, but commented; “the data does not yet support a “one and done” narrative. Inflation moved higher because of base effects but is expected to resume its decline in the coming months. Wages growth is expected to track lower as well with its current stickiness reflecting the prior level of inflation.”

In this context, it considers that sentiment could shift again.

CIBC expects the Euro-Zone will struggle initially, but added; “We assume that an easier global monetary policy bias will support a broad euro recovery narrative into 2025.”

It expects GBP/EUR will settle around 1.1765.

There were no major UK economic developments during the week with the media focussing on the General Election campaign.

Opinion polls continue to indicate a very strong Labour Party lead and a substantial majority in the House of Commons.

MUFG commented; “After 8 years of instability, a large Labour victory will lead to welcomed expectations of stability – a GBP positive.”

According to CIBC; “Should the polls tighten as the electoral campaign proceeds, (we expect a narrower Labour majority than implied by the polls), we can expect an uptick in Sterling vol allied to a moderation in Sterling valuations.”

The Bank of England remained silent during the week, dampening talk of interest rate cuts.

According to ING; “we think that by August’s meeting, assuming the data shows April inflation was a blip, then a majority will rally behind the idea of cutting rates.

It added; “We’re therefore sticking to our base case for an August rate cut and three cuts in total this year.”

The data flow will be strong over the next two weeks with key data on jobs and inflation.

As far as the Pound is concerned, SocGen focussed on interest rates and commented; “although the first Bank of England (BoE) interest rate cut will be after the ECB, it sees scope for the BoE to cut rates more than the ECB which will tend to undermine the Pound.”

SocGen added; “So far, it’s all about rates and UK data isn’t doing anything to feed hopes of imminent BOE easing. We expect modest GBP weakness in due course, if only because the BoE has more room to ease than the ECB does, even if it starts later.”
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