• ING raises its EUR/GBP forecast
  • MUFG holds a tactical long EUR/GBP
  • Credit Agricole says EUR will benefit from ECB policy change

Image © Pound Sterling Live

The Bank of England’s monetary policy meeting in May led to a significant drop in the value of the pound as well as a shift among currency analysts, who now anticipate further weakness in the British currency.

ING foreign exchange analysts have raised their forecasts for the euro-pound exchange rate while warning that the risks from this point of view are on the rise.

Currency strategists at investment bank MUFG say they have a tactical recommendation to go “long” EUR/GBP, anticipating further gains for the euro against the pound.

“We were recently short GBP against the US Dollar and this trade has reached our take profit level, but we believe we should still be short GBP and this time we have chosen the Euro as our currency to be long,” says Derek Halpenny, Heat of Research for Global Markets EMEA at MUFG in London.

Analysts firmed up expectations of sterling underperformance following the Bank of England’s May update in which interest rates were raised to 1.0%, but a set of weak economic forecasts spooked the markets.

The pound fell sharply after the Bank said UK economic growth is expected to slow sharply in 2022 and 2023 following a spike in inflation, which could hit 10% later in the year.

But forecasts of inflation returning to 2.0% in the longer term have signaled to markets that the Bank of England may be ready to suspend interest rate hikes, depriving the pound of support. crucial.

“The BoE rate meeting in May was the catalyst for the breakout of the EUR/GBP trading range to the upside this year,” said Chris Turner, global head of markets at ING Bank.

EUR to GBP Forecast ING

The euro-pound exchange rate rose 1.45% on the day of the Bank’s policy update to above 0.85 and has continued to rise ever since.

This resulted in a corresponding drop in the pound-euro exchange rate below 1.1750, a level it has not closed below since December 2021. (Set your exchange rate alert here).

MUFG’s Halpenny said the BoE policy meeting had “made it very clear that we are about to take a break, which was signaled by the dismal GDP forecast.”

The Bank of England’s forecast showed that if interest rates were to be suspended at the current level of 1.0%, inflation would still return close to the target of 2.16% over a horizon of three years.

“It’s a clear signal that we’re about to take a break,” Halpenny says.

ING’s Turner says that going forward, the pound will be sensitive to negative economic data, especially wages and consumption.

Confirmation that the UK economy is heading in the direction predicted by the Bank of England could support the recent downward trajectory in the value of the pound.

However, better than expected results might offer some relief.

“For the UK, the focus will be on how inflation rises,” says Turner. “The GBP will be even more sensitive to hard data on consumption as well as wage growth.”

The euro, meanwhile, could benefit from a change in stance from the European Central Bank (ECB), which suggests that it could now accommodate a stronger exchange rate.

The ECB has long favored a weaker euro as it boosts the competitiveness of eurozone exports while being inflationary.

But fast forward to 2022, inflation of the kind experienced in the euro zone is not welcome, given the acute pressures on the costs of energy and imported raw materials.

Analysts are therefore of the view that the ECB would welcome a stronger euro to ease imported inflationary pressures and may change policy stance to bring about such an outcome.

“If the ECB wants a firmer euro, EUR/GBP will have to rise given the large weight of sterling in the euro trade-weighted basket,” Turner said.

The ECB appears keen to raise interest rates as early as July in the face of rising inflation, with some Governing Council members seeing a crucial window for action.

ECB rate hike expectations

Above: Market expectations for ECB rate hikes have risen lately. Image courtesy of Goldman Sachs.

Rises would support euro exchange rates, analysts say.

“The removal of negative rates in the eurozone could be positive for the euro,” says Valentin Marinov, head of G10 FX strategy at Credit Agricole. “The removal of negative rates in particular can have a positive impact on the single currency for a number of reasons.”

Reasons include increased profitability for eurozone banks, the unwinding of euro carry trades, the repatriation of income from abroad and an improvement in the attractiveness of holding euro cash deposits.

Credit Agricole, however, said its models suggest that the pound is oversold against the euro in the short term and therefore anticipates a recovery in the short term.

But ING this week raised its year-end EUR/GBP target to 0.86 from 0.84 and maintains its 2023 year-end target at 0.88.

“There are probably upside risks for both,” Turner says.

EUR/GBP at 0.86 gives an exchange rate target between the pound and the euro of 1.1628, against 1.19 previously. 0.83 EUR/GBP translates to 1.2050.

MUFG meanwhile targets EUR/GBP higher to 0.88, giving GBP/EUR a decline to 1.1364.