Pound-Euro Will Finally Make a Break Higher says Westpac

• GBP/EUR could break higher and out of its long-running range
• Westpac strategists look to sell EUR/GBP as a consequence
• But Macro Hive say the range will be respected
• Say EUR/GBP now looking cheap

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Pound Sterling might finally break out of its long-running range against the Euro, according to strategists at a major global investment bank.

Westpac's FX strategists are looking for the Pound to advance as the Bank of England maintains a "restrictive stance" at next week's interest rate decision.

The call comes ahead of the European Central Bank's January policy decision, where policymakers are tipped to emphasise interest rate cuts are not imminent, but Westpac thinks the risks of a cut before midyear is possible owing to weak regional data.

This potentially creates a divergence in interest rate policy that can sustain the recent rally in the Pound to Euro exchange rate (EUR/GBP downside).

The pair has been locked between 1.1410 and 1.1770 since May of 2023, but 2024 has seen Sterling push the exchange rate towards the top end of the range.

Pound-Euro reached 1.1715 on Wednesday, a four month high, before paring the advance.

Previous attempts to sustain levels above 1.17 have proven futile, suggesting the exchange rate will struggle to overcome technical resistance here.

But Westpac's strategists expect further gains, eyeing next week's Bank of England policy decision, which will reference the 'sticky' nature of UK core inflation.

Above: Closing above 1.17 is hard to do. Track GBP/EUR with your own custom rate alerts. Set Up Here

Furthermore, impending tax cuts, likely to be announced in March's budget, will encourage the Bank of England to remain cautious about cutting interest rates.

"This week’s UK public finances data have shown further fiscal improvements. However, this is likely to be used as an opportunistic means of cutting tax in the Govt.’s March budget as a pre-election sweetener. The overall stance is therefore likely to play into the hands of the more hawkish MPC members and have the BoE maintaining a restrictive stance," says strategist Sean Callow at Westpac.

At the same time, Eurozone data suggests a technical recession is underway, confirmed on Wednesday by weak PMI figures for January.

"Although the ECB governing council look likely to indicate that they are very much on pause and that easing is unlikely before mid-year, they are also highly data dependent. Further soft data will sustain potential for an earlier or steeper easing path," says Callow.

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Westpac's strategists sell the Euro-Pound exchange rate at 0.8555, targetting a move to 0.8475 and then 0.8400.

This equates to a buy on the Pound-Euro exchange rate from 1.1690 to approximately 1.18 and then 1.19.

However, analysts at independent research and strategy firm Macro Hive are looking for the Pound-Euro to respect its long-running range and say now could be the time to bet on a Euro rebound.

"This week, EUR/GBP printed its lowest levels since September, primarily catalysed by a hawkish pricing tilt in BoE expectations," says Richard Jones, an analyst for Macro Hive.

Above: EUR/GBP at daily intervals. "EUR/GBP enters the buy zone" - Macro Hive.

"We think this hawkish BoE pricing has gone too far and that ECB easing will be less aggressive than the market currently prices," he adds.

Jones explains that the Euro "has now cheapened to attractive levels" against the Pound.

"The pair now trades just above 0.8550, hovering above the solid support near 0.8500, the lows seen in July and August," he says. "As such, ahead of this solid support zone, we think there is value in fading the recent decline in EUR/GBP."