Pound Sterling to Hit 1.27 Against the Euro? It's Not Impossible Predicts Saxo Bank

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Pound Sterling could see ongoing resilience against the Euro in the coming months, but one investment bank says such calls might not be ambitious enough.

A new out-of-consensus prediction from Saxo Bank says there is a chance the Pound to Euro exchange rate races all the way back to 1.27 in 2025.

"As Europe’s economy struggles, fresh fiscal policy winds are blowing in the UK, driving sterling back to levels versus the euro not seen since before Brexit," says John J. Hardy, Chief Macro Strategist at Saxo Bank.

The call is one of Saxo's "outrageous" predictions for the year ahead, making it one of several out-of-consensus forecasts that still fall within the realms of possibility.

The prediction comes amidst a broadly constructive view on the Pound for 2025 amongst institutional analysts. "We think a bullish set-up for Sterling should see it keep pace with a broader appreciation in the Dollar," says Kamakshya Trivedi, Head of Global Foreign Exchange at Goldman Sachs.

For its part, Goldman Sachs thinks the Pound to Euro exchange rate can move well beyond 1.20 next year.

However, Saxo thinks there is a scenario where the Pound can appreciate further than the consensus expects.

Backing the Pound

Hardy says the UK outlook is as constructive as ever in the post-Brexit era. "That is, it is the most positive relative to the sick man of Europe, which is, well... Europe, or at least the core Eurozone countries, France and Germany."

Saxo says fresh fiscal policy winds are blowing in the UK, where the new UK Labour government announced budget priorities ahead of 2025 that avoided the most growth-damaging types of tax hikes on income while trimming the least productive public sector spending in moving to shrink its deficits.

"By cutting unproductive subsidies like winter fuel aid for pensioners, encouraging investment in the property and manufacturing sectors and raising incomes for public sector workers, the UK is primed for solid nominal growth in the years ahead, keeping the Bank of England policy rate at a high level compared to major global peers," says Hardy.

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.

But there are Headwinds...

An obvious headwind to this view is the chorus of businesses that have pointed out that the Labour government's budget has been anything but pro-growth, as it has imposed billions of pounds of new taxes on employers.

Inflation-busting rises to the minimum wage, onerous new employment legislation and raising the jobs tax have all piled pressure on businesses, and economists warn UK unemployment could rise faster than current estimates predict.

Yet, Europe Fails to Inspire

Nevertheless, Saxo thinks the Euro is in a worse-off position.

"On the European continent, the situation couldn’t be more different. France has a dysfunctional government that is mired in a five-year exercise of getting its out-of-control budgets in order. It has already announced growth-killing taxes on personal and corporate income and austerity. Shield your eyes!" says Hardy.

"Germany remains the sickest of the sick in Europe, unwilling to debt finance desperately needed domestic investment in housing and infrastructure that it could easily afford. Its former economic model of cheap Russian energy inputs to drive its huge industrial base and manufactured exports lies in ruins," he adds.

Given this, Saxo Bank's out-of-consensus prediction sees a route for Pound-Euro to rise through 1.27 in 2025, the level it traded ahead of the Brexit referendum, thus erasing its entire post-Brexit vote discount.

Hardy says this could encourage domestic investment and a more robust growth outlook support sterling versus the flailing euro, seeing the Euro/Sterling rate fall as low as 0.7500, below the rate the day before the Brexit vote at 0.76.

He thinks the UK FTSE 100 could also post a strong performance.