Barclays Revise Lower Pound-Euro Forecasts

"Should that narrative persist and lead the BoE to raise rates by less than what forwards anticipate ... the currency could weaken more than our forecasts imply" - Barclays.

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The Bank of England's softening approach to interest rate hikes will hit the Pound's valuations say foreign exchange strategists at Barclays who this week lower their forecast targets against the Euro and Dollar.

"The Bank of England has recently sent signals that they would tolerate a large and persistent inflation overshoot to cushion for risks to growth," says Barclays in a note accompanying some non-negligible slices to their Sterling targets.

The call comes in the wake of the Bank of England's May policy update that saw interest rates rise alongside the promise of further moderate rises in the future.

But it was the release of surprisingly downbeat growth forecasts and racy near-term inflation upgrades that ultimately sent the Pound spinning lower.

Lumping weight to the Pound was the Bank's medium-term inflation forecasts - arguably the most important statistic in the entire Monetary Policy Report - that showed inflation would ultimately trend back towards the 2.0% target with no further interest rate hikes.

This prompted markets to lower their expectations for the number of rate hikes the Bank was willing to deliver over coming months.

"Should that narrative persist and lead the BoE to raise rates by less than what forwards anticipate – in line with our revised economic forecast – the currency could weaken more than our forecasts imply towards 0.90," they add.

EUR/GBP at 0.90 gives a GBP/EUR target of 1.11; incidentally we reported earlier this week UniCredit have lowered their Pound-Euro forecast to this level while warning it could even go lower.

"Our forecast is not as aggressive," says Barclays, "as we are factoring in the probability of some fiscal easing ahead, or that the balance of growth vs inflation outcomes may ultimately allow for less of a BoE undershoot."

"We are revising our EUR/GBP path from 0.83 to 0.87 flat across tenors," says Barclays.

This gives a Pound to Euro exchange rate forecast downgrade from 1.2050 to 1.15 for the outlook through to the end of the first quarter of 2023.

Regarding their Sterling-Dollar outlook, they lower their mid-year target from 1.31 to 1.17, the end-September target from 1.35 to 1.17, year-end to 1.22 from 1.39 and end-Q1 2023 from 1.39 to 1.26 (set your FX rate alert here).