GBP/EUR Rate Forecast Upgraded at BNP Paribas

Image © Pound Sterling Live

Pound Sterling can go higher against the Euro, supported by fundamentals that include attractive valuations, an interest rate buffer, and upside risks from the upcoming general election.

These are the predictions of BNP Paribas, one of Europe's largest lenders and investment banks. "We are turning more positive on GBP," says Alex Jekov, BNP Paribas's FX strategist.

The analyst cites the following reasons for positioning for a stronger Pound to Euro exchange rate over the coming months:

Less Vulnerable

Above: "Foreign investor buying of UK debt has remained strong" - BNP Paribas.

BNP analysis finds that the UK's external vulnerability is less acute than suggested by the UK's large negative net international investment position and persistently wide current account deficit.

"We think foreign investor buying of UK debt can continue to partially offset the impact of a persistent trade deficit," says Jekov.

Furthermore, BNP Paribas does not foresee a deterioration in the UK’s trade deficit and hence sees limited risks to GBP from this channel.

A Yield Advantage

"Front-end UK yields are among the highest in the G10 bloc, providing a carry buffer," says Jekov.

UK bond yields are relatively elevated to elsewhere owing to the rise in Bank Rate to 5.25% as the Bank of England seeks to bring inflation back to 2.0%.

Market pricing shows the Bank is likely to raise rates after the Fed and ECB owing to 'sticky' UK inflation, which means this yield support can persist.

Politics

"Opinion polls suggest that the Labour Party will win a large majority at the upcoming UK general election, which would usher in a period of greater certainty regarding the UK’s political backdrop, benefitting the GBP," says Jekov.

Analysts at Barclays are also inclined to view the UK's political backdrop as somewhat supportive of Pound Sterling's outlook, having entered 2024 with a view that the currency's Brexit has peaked.

Barclays sees a further unwind of any Brexit premium in the Pound following the UK's next general election, which can "add to its medium-term appeal".

Predictions for the Pound against the Euro

"GBP valuations are cheap and we expect UK yields to remain elevated compared to the rest of the world," says Jekov.

BNP Paribas now forecasts the Euro to Pound exchange rate to fall to 0.83 this year. This translates into a Pound to Euro conversion of 1.2050.

Barclays meanwhile forecasts "EURGBP grinding towards 0.82 by Q1-25".

This equates to a "grind" higher in GBP/EUR to approximately 1.22.