Pound to Euro Week Ahead Forecast: Drifts Weaker, 1.1495-1.1905 2024 Ranges

March 3, 2024 – Written by John Cameron


Foreign currency strategists at MUFG expect that the Pound to Euro exchange rate (GBP/EUR) volatility is too low and that the pair will weaken to 1.1495 at the end of 2024.

Bank of America, however, expects net GBP/EUR gains to 1.1905 at the end of the year on improved UK fundamentals.

There have been no major UK developments during the week with markets looking ahead to the budget next week.

The housing data remained positive with mortgage approvals strengthening to the highest level since October 2022 while the manufacturing PMI index strengthened to a 19-month high, but remained in contraction.

GBP/EUR overall has drifted weaker to 1.1675 from just above 1.1700 last week.

According to SocGen, GBP/EUR is out of line with yield spreads and slightly too strong. This means that either GBP/EUR is overvalued or market pricing for interest rates is wrong.

Socgen added; The market is still pricing a first BoE rate cut this summer, and three cuts over the next 12 months. The UK has some helpful base effects that will weigh on inflation in the next couple of months, but the economic data are improving, some pre-election fiscal easing is likely, and the labour market remains very tight.


It added; “Maybe it’s the FX market that is correctly priced and the rates market that is too enthusiastic about [BoE] rate cuts?”

MUFG expects the BoE will have to adopt a hawkish policy stance; “We certainly see a greater risk of further divergence in forward rates pricing given the communications from the BoE remain concerned over sticky services inflation and wage growth in a labour market that is a lot tighter than in the euro-zone.”

The Treasury announced that Clare Lombardelli will succeed Ben Broadbent as Deputy Governor for Monetary Policy in July.

MUFG added; “Incoming new Deputy Governor Lombardelli could add to MPC caution based on her previous most recent comments at the OECD.”

A restrictive BoE policy would underpin the Pound in the short term, but there would be the risk of fresh damage to the economy and MUFG is not convinced over UK fundamentals.

The UK budget will be released on March 6th.

According to Bank of America (BoA); “The March Spring Budget is now not considered the negative tail risk it once was following better than expected borrowing data in recent months and affording the Government greater headroom for the inevitable tax cuts before the General Election.”

BoA is now more positive on the UK outlook and added; “The coming months could provide the sweet spot for GBP.”

The ECB will announce its latest policy decision on March 7th.

The headline Euro-Zone consumer inflation rate declined to 2.6% for February from 2.8% previously, but slightly above consensus forecasts of 2.5%.

Core inflation retreated to 3.1% from 3.3%, but significantly above market expectations of 2.9%.

The stronger than expected data will tend to reinforce ECB resistance to an early cut in interest rates.

For the ECB to cut rates, ING considers that; “Along with actual eurozone inflation hovering around 2.5% for a few months, long-term inflation forecasts will also need to remain unchanged at 2.0%, and nominal wages will need to come down to around 4%.”

It added; “Evidence from German data suggests some components of inflation (like services CPI, which accelerated in January) and a more unfavourable base effect from now on pose threats to ECB easing hopes.”

Nordea commented; “we now assume that the staff will have to again revise down both the GDP and inflation forecasts in the March round.”

According to Danske Bank; “Next week, on Thursday 7 March, the ECB is set to take another step in its policy normalisation process, from a restrictive monetary policy stance towards a neutral stance.”

Danske added; “While neither the revisions to staff projections nor Lagarde will close the door to a rate cut at a specific meeting, we continue to expect that the key meeting for the first rate cut will be the meeting in June. We do not believe that the incoming data since the January meeting has been sufficiently weak to make April the baseline meeting.”

According to Commerzbank; “At the moment, there does not seem to be any momentum for the Euro to weaken. Friday’s inflation figures will certainly be crucial, but there is no trend towards a weaker Euro, at least not at the moment.”

MUFG noted that volatility has collapsed to the lowest level since just prior to the Global Financial Crisis in 2007. An August rate cut as a first from the BoE is looking most likely now which opens up divergence potential to shake EUR/GBP from the current extraordinarily low levels of volatility.

According to MUFG; “It’s hard to view the current levels of volatility in EUR/GBP as justified given the high level of uncertainty on what lies ahead and it appears there’s a level of complacency over the outlook.”

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