– Written by
Frank Davies
STORY LINK Pound to Euro Weekly Forecast: ECB Rate Hike Threatens GBP Yield Advantage
The Pound to Euro exchange rate (GBP/EUR) has held close to 1.1685 as subdued summer trading keeps the pair confined to narrow ranges, but September could bring a decisive shift. Markets increasingly expect the European Central Bank to raise interest rates, while the Bank of England is likely to remain on hold, putting Sterling’s substantial yield support under greater scrutiny.
GBP/EUR Forecasts: Big September decisions
UBS is forecasting that the Pound to Euro (GBP/EUR) exchange rate will strengthen to 1.1765 on a 12-month view amid solid Pound fundamentals.
According to UBS; “Improving UK sentiment and yield demand should support Sterling.”
ING expects GBP/EUR will retreat to 1.11 on a 12-month view as Pound yield support is eroded.
GBP/EUR found support above 1.1650 during the week and traded around 1.1685 as narrow ranges prevailed amid the Summer doldrums in Europe.
Higher energy prices were a key element during the week as gas prices hit a 3-year high and there will be implications for both monetary and fiscal policy.
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Markets are not expecting the Bank of England to hike rates at the September meeting. The consensus is for a rate hike by year-end, although conviction has faded slightly during the last two weeks.
Rabobank commented; “Since the market still sees some risk of higher rates this year, steady policy, in line with our view, could undermine the pound.”
Markets will also be monitoring UK fiscal chatter as parliament returns from the recess with the Autumn budget due in late October.
German business confidence data was stronger than expected with an increase to a 12-month high.
ING commented; “the latest German macro data is a welcome change, stressing the economy’s resilience. Despite the obvious headwinds, the German economy is on track for its best growth performance since 2022.”
The ECB will be watching the data closely. ING commented on the ECB outlook; “Two weeks from now, the ECB will meet again, and the stage looks increasingly set for another rate hike.”
It added; “Not only because some ECB members actually advocated for a rate hike at the July meeting, but since the July meeting, the eurozone economy has shown an almost unexpected resilience to the war in the Middle East, partly due to good luck and the fact that Asian competitors were hit harder by the closure of the Strait of Hormuz and lost orders to European competitors, but also due to long announced fiscal stimulus.”
MUFG also sees growing support for an ECB hike; “Schnabel has already spoken and it was clear that her focus remains firmly on upside inflation risks that indicated to us that the risks of a further rate hike by the ECB beyond the expected September hike is becoming more realistic.”
As far as the UK is concerned; “For the BoE, the backdrop does not look as urgent and the data provides continued scope for the BoE to remain more patient than the ECB.”
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TAGS: Pound Euro Forecasts
