Currency exchange analysts at Bank of America revised higher their Pound to Euro (GBP/EUR) exchange rate outlook last week.
Instead of expecting a rise in the EUR/GBP to 0.91 (equivalent to a fall in GBP/EUR to 1.0990), the bank’s strategists now anticipate the Euro to Pound rate to rise to around the 0.85 mark (or 1.1765 for Pound to Euro) up until late 2024.
Currency analysts at Credit Agricole, however, consider Pound Sterling is overbought.
The British Pound (GBP) maintained recent strength against the Euro (EUR) last week, something even more impressive given Euro’s gains in global markets.
The week’s session saw the Pound to Euro (GBP/EUR) exchange rate post a nine-month high just above the 1.1700 level.
Sterling was bolstered as market expectations surrounding Bank of England base rates increased after the much higher-than-expected inflation print for April.
There was a further spike in GBP following the latest labour-market data which showed a further net increase in employment for May.
The headline increase in earnings strengthened to 6.5% from 6.1% while underlying earnings increased to 7.2% from 6.8% with both figures well above consensus forecasts.
The data sparked a further increase in BoE expectations.
Markets are pricing in a 79% chance of a 25-basis-point rate increase to 4.75% at next week’s meeting.
Futures markets are also pricing in just over a 20% chance of a 50 basis-point rise.
Money market rates also indicate that rates could be at least 5.70% by the end of 2023.
There were sharp losses for UK gilts and the 2-year yield posted 15-year highs above the 4.90% level.
Higher yields will provide further near-term Sterling support into next week’s BoE meeting.
Credit Suisse outlines the bullish argument. It noted; “Getting to a 5.75% rate by December as markets are pricing may simply be too slow and the BoE might yet need to start hiking in 50 bps increments again, as it last did in Feb.”
The bank added; It’s also the case that GBP could well become and then remain among the highest yielders in G10 space, something which can attract carry-chasing money to the UK at a time of low global asset volatility.”
Credit Suisse sees scope for further Pound gains; “We see room for the broad trade-weighted GBP to test post-2016 highs seen in early 2022 around 2% above current levels.”
It added; “We lower our near-term EUR/GBP target to 0.8450 (1.1835 for GBP/EUR).
Pound (GBP) Exchange Rates: Are BoE Expectations Excessive?
There are, however, still important reservations over the Pound.
There is still an important scepticism that market pricing of interest rates in justified
According to CIBC; “we expect the terminal rate to top out at 5.00%, as rates in excess of such levels would amplify recession risks. Indeed, early signs of a roll-over in food prices, while labour markets and wages appear set to moderate, points towards a graduated reduction in UK terminal rate assumptions in the next few months.”
ING takes a similar stance; “Our macro view is that the Bank Rate does not make it over 5.00% and that the market can be disavowed of its aggressive expectations by softer wage and price data over coming months.”
A related risk for the Pound is that further interest rate hikes trigger a fresh downturn in the economy with a fresh risk of recession.
According to Raobank; “If the market begins to assess that the Bank may have to push the economy into recession into order to push CPI inflation back to 2%, GBP could begin to falter despite the higher rate environment.
It added; “We have revised our one-month EUR/GBP forecast to 0.86 (1.1630 for GBP/EUR) from 0.87 (1.1490 for GBP/EUR). However, we still see risk of EUR/GBP 0.90 on a 12-month view. (1.1110 for GBP/EUR).
MUFG noted the housing-sector risks; “Indeed, it is the housing market where we are likely to see increasing stress as past monetary tightening feeds into the economy.”
HSBC notes the scope for mixed interpretation; “They also point to a risk of a soft May reading given the extra bank holiday. So, either one bemoans the lack of growth despite the rise in employment and hours worked, or breathes a sigh of relief that things were not worse.”
Euro (EUR) Exchange Rates’ Outlook Hinges on ECB Staying Hawkish
The ECB increased interest rates by 25 basis points at the latest policy meeting, in line with consensus forecasts, and the refi rate hit a 15-month high at at 4.00%.
According to Nordea; “If the ECB is already now prepared to signal another hike for July, it could easily raise rates again in September, unless the updated forecasts show a clearly improved inflation outlook.”
Bank of America has dropped its expectations of GBP/EUR losses; “We had previously expected a gradual move in EUR-GBP higher to 0.91 over the longer term (1.0990 for GBP/EUR), but we now look for EUR-GBP to focus around the 0.85 level (1.1765 for GBP/EUR) through the end of our forecast horizon for the end of 2024.”
Credit Agricole considers Pound Sterling is overbought; “On the less positive side, the GBP looks overbought while our corporate flow data is pointing at GBP selling, especially vs the EUR.”
