Pound Sterling Tipped to Struggle Against Euro in October: Investment Bank Analysts
- Written by: Gary Howes
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- Tide shifting for GBP says Barclays
- UBS lower GBPEUR forecasts
- But weakness to be limited
- The key dates to watch this Oct.
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The British Pound is tipped to struggle against the Euro over the course of October as a hangover from a rough September extends, but weakness will likely remain limited as the Eurozone and UK economies are unlikely to diverge.
The Euro and Dollar have fallen sharply against the Dollar through the August-September period owing to ongoing U.S. economic outperformance which leaves both at risk of further decline against the Dollar and confirms how important the theme of economic divergence is for the FX market.
But, "the growth outlook for the Eurozone and UK look similar," says Clémence Dumoncel, a Strategist at UBS.
Strategists at the Swiss-based bank say the lack of a clear growth divergence between the EZ and UK economies is going to keep the Pound to Euro conversion contained in its long-term range, although they expect the exchange rate to edge lower and back towards 2022 levels.
"We increase our EURGBP forecasts to 0.88 for December, 0.87 for March, 0.86 for June, and 0.86 for September 2024. EURGBP has been rangebound for most of the past five years," says Dumoncel in a recent note.
This gives a GBPEUR forecast profile of 1.1360, 1.15 and 1.1630 for the mentioned time points.
Above: GBPEUR at daily intervals with the approximate level of support located in the 1.1490-1.15 level annotated. Should support hold, a bounce back into the medium-term range can transpire this month.
The Pound slid 1.30% against the Euro in September, its largest monthly decline since December 2022, thanks largely to a rapid repricing in Bank of England interest rate expectations amidst signs of a slowing economy.
The September 20 inflation data release undershot expectations and confirmed the UK's elevated inflation rate continues to ease, prompting the Bank of England to hold interest rates unchanged on September 21.
Elevated rate hike expectations had been the engine behind Sterling's 2023 outperformance and the lowering in expectations ultimately dragged the currency lower against all its major peers.
Analysts at Barclays say the Bank's decision to hold rates unchanged at its latest meeting "is evidence of the shifting tide for the pound".
"Despite a tight vote (5-4) and considerable data uncertainty, mounting evidence of demand damage and labour market cooling make the BoE's renewed reluctance to lift rates much higher from current levels more credible than in the past," says Barclays in a regular weekly note to clients.
"While sticky wage growth and inflation imply considerable carry support for longer, the case for sterling outperformance is no longer there," the communication adds.
Barclays's forecasts envisage Pound Sterling to be broadly range-bound versus both the Euro and U.S. Dollar in coming quarters, with the balance of risks around these projections modestly skewed to the downside.
Key dates in the coming month are October 17's labour market report when a new set of wage and employment numbers are released.
A stronger-than-expected wage figure could bolster expectations for a November interest rate hike, which would potentially see the Pound-Euro rate firm up above 1.15.
But we saw the Bank of England discount the elevated wage numbers in their September policy update, which suggests it is placing less emphasis on wages at the current juncture.
October 18's inflation release will be the Pound's highlight of the month as markets will be looking for further cooling in UK inflation.
Recall that September's release triggered a selloff in the currency as markets rapidly lowered expectations for a hike at the Bank of England. This month's figure will influence the November 02 policy decision and is therefore of significant importance for the Pound.
