– Written by
David Woodsmith
STORY LINK Pound-to-Euro Forecast: By-Election Jitters Put GBP on Defensive
The Pound to Euro exchange rate (GBP/EUR) remains under pressure as UK political risks return to centre stage ahead of a crucial by-election, compounding expectations of further Bank of England rate cuts.
After sliding to eight-week lows below 1.1430 earlier in the week, Sterling has struggled to regain firm footing despite stronger-than-expected retail sales data, with markets increasingly focused on narrowing UK-Eurozone yield spreads and leadership uncertainty within the Labour government.
GBP/EUR Forecast: Politics centre-stage
Nomura expects a short-term slide in the Pound to Euro (GBP/EUR) exchange rate to 1.1170 amid renewed political fears surrounding the Labour government with a crucial by-election this week.
Danske Bank expects more gradual GBP/EUR losses to 1.1240 on a 12-month view.
The Pound posted significant losses during the first half of the week as weaker than expected labour-market data and a decline in headline inflation to 3.0% boosted market confidence that the Bank of England (BoE) would continue to cut interest rates.
GBP/EUR dipped to 8-week lows below 1.1430 before a tentative rebound to near 1.1450 after stronger than expected UK data on Friday with a beat for retail sales and government borrowing data.
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Overall, there are strong expectations that the BoE will cut rates at the March meeting.
ING commented; “We expect a rate cut at the Bank of England’s March meeting, which is now 20bp priced in, and we still forecast another move in June, which is only 40% priced in. Political risk remains the other major risk for the pound.”
It added; “A move past 0.880 remains our baseline for EUR/GBP.” (GBP/EUR losses below 1.1360)
According to Nomura; “we expect these data outturns to potentially lead MPC members, who voted for unchanged policy rate at the February policy meeting, to support resuming rate cuts from March onwards.
The bank added; “With respect to more cyclical factors, a narrower rate differential (EA-UK) supports EUR/GBP to continue moving to the upside.”
Nomura also pointed to political difficulties;
“Although Starmer has survived recent challenges, with cabinet members declaring their support for him, the Gorton and Denton by-election on 26 February poses significant risks for Starmer to stay as Prime Minister.”
Nomura also maintains a positive Euro stance; “Tight labor market and sticky wage growth supports EUR’s resilience.”
According to the bank; “All in all, we retain our max conviction 5/5 for our long EUR/GBP trade.”
RBC Capital Markets is less convinced that politics will derail the Pound;
“The market’s default assumption appears to be that a change of Prime Minister/Chancellor would pivot the incumbent Labour government to the left.
The market has previously reacted negatively when it appeared that the Chancellor might be about to be replaced, though we are less convinced that outcome is the given that is sometimes assumed.”
Danske Bank sees economics as hampering the Pound;
“We see domestic factors and the relative growth outlook between the UK and the euro area as GBP negatives. This is further amplified by divergence in the fiscal policy outlook.”
The bank added;
“The key risk to seeing EUR/GBP trade substantially higher than our forecast is a sharp sell-off in global risk and/or renewed focus on the UK’s fragile fiscal position.”
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TAGS: Pound Euro Forecasts
