Pound to Euro Near-term Forecast: Rebound Potential

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Pound Sterling looks set to recover against the Euro in the coming holiday-shortened days.

The Pound to Euro (GBP/EUR) exchange rate attempts to recover from the selloff that followed Thursday's Bank of England policy decision and is quoted at 1.2075 at the time of update on Monday.

The rally brings it to the nine-day moving average (EMA), which could act as a near-term cap.

The gain comes despite economic growth data released on Monday showing that the UK economy saw no growth in the third quarter, undershooting estimates of 0.1% growth. That said, the handover from the previous government was better than expected, with second-quarter growth revised higher to 0.4%.

The annual figure was 0.9% growth for the year to the third quarter, below the expectation of 1.0%. These data confirm the economy has slowed dramatically in the second half of the year, keeping the door open to further interest rate cuts at the Bank of England in 2025.

Due to the Christmas holiday, the coming week lacks further meaningful market-driving data and events. Holiday-thinned market conditions mean low liquidity in FX markets, which can see some unusually large moves.

However, we would expect any unusual moves to be faded amidst mean reversion tendencies.

The above chart shows buying interest has emerged at the horizontal support area at 1.2030; we pointed out this line on the charts last week and said it would be an initial post-Bank of England sell-off target where buying interest can be found.

With gains coming off this level on Monday, we wonder if it can provide a near-term floor from which to stabilise the post-Bank of England selloff.

The Pound was sold last week after the Bank left interest rates unchanged, but three of the nine-member Monetary Policy Committee (MPC) voted to cut them, which suggested that the MPC would likely cut rates by more than markets expect in 2025.

The MPC's statement revealed concerns over the slowing economy, which could benefit from lower interest rates. Bank of England Governor Andrew Bailey said on December 5 that he thinks four rate cuts are appropriate in 2025, and we think the outcome of last week's event would verify that.

Goldman Sachs point forecasts for 2025 are out, showing ongoing resilience for GBP/EUR. But how high can the exchange rate go? Find out more.

The market entered the previous week expecting a mere two 25 basis point cuts next year, and the repricing to four cuts could extend into early 2025, putting the Pound under pressure.

However, the Eurozone's fundamental headwinds, including chronically low growth in France and Germany, will limit its weakness. Both countries have seen their economic growth stall and will need to hold new elections in the coming year.

This uncertainty, along with cooling inflation, will allow the European Central Bank (ECB) to 'outcut' the Bank of England, creating the monetary divergence that can underpin Pound-Euro.

ECB President Christine Lagarde told the FT on Monday that she was optimistic that the central bank was on course to achieve its 2.0% inflation target.

Lagarde stated that "we are getting very close" to the point when "we have sustainably brought inflation to our medium-tern 2%."

The comments bolster the view that falling inflation will allow the ECB to 'outcut' its peer central banks, keeping the Euro under pressure.

Note that the GBP/EUR exchange rate trades above all its key moving averages and the medium-term trend is very much towards the upside. A number of analysts we follow think a more protracted move into the early 1.20s in 2025 is likely amidst a broadly supportive fundamental setup.

So, although the coming hours and days can see further weakness, a resumption of the upside rally is still expected.