Foreign exchange analysts at Danske Bank expect that overall yield spreads will nudge the Pound Sterling weaker against the Euro as the Bank of England (BoE) cuts rates three times in 2024.
Despite initial resilience, it also expects the relatively weak UK fundamentals will undermine the UK currency, especially if overall risk appetite deteriorates.
Danske Bank remains confident that UK inflation will continue to weaken as the tight labour market continues to unwind.
Danske also expects that the BoE will cut rates at the June meeting and then sanction two further rate cuts over the second half of 2024.
Although the bank also expects that the ECB will cut interest rates three times in 2024, markets have only priced in two BoE rate cuts and the Pound will, therefore, be vulnerable on overall moves in yield spreads.
Danske also expects that the UK growth rates are likely to under-perform relative to the Euro area. It also notes that the UK runs a substantial current account deficit which will leave the currency vulnerable if global risk conditions deteriorate, especially as the Euro area runs a current account surplus.
It does note that the Pound is likely to resist losses if the UK economy manages to out-perform and GBP/EUR forecasts have been revised slightly higher.
KEY QUOTES:
“Growth picked up in the first quarter of the year with the UK economy growing 0.6% q/q driven by services, production, and business investment.”
“Inflation has been slightly stronger than expected.”
“We expect the Bank of England (BoE) to deliver the first cut of 25bp in June.”
“We expect 25bp cuts in the following quarters, totalling 75bp of cuts for 2024.”
“The UK runs a large current-account deficit, which makes GBP vulnerable when capital inflows fade.”
“GBP remains fundamentally undervalued with our Brexitcorrected MEVA estimate for EUR/GBP around 0.83.”
“EUR/GBP remains sticky around the 0.8550-0.8600 mark.”
“We target the cross at 0.88 in 6-12M.”
