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Pound to Euro Near-term Forecast: 1.20 Possible

Published 23/12/2024, 07:37
© Reuters.  Pound to Euro Near-term Forecast: 1.20 Possible
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Pound Sterling is under near-term pressure against the Euro.

The Pound to Euro (GBP/EUR) exchange rate has yet to recover from Thursday's Bank of England policy decision and could be subject to near-term pressure.

The Pound fell sharply after the Bank of England left interest rates unchanged but signalled to markets not to underestimate its intention to continue cutting rates through 2025.

Owing to the Christmas holiday period, the coming week is devoid of market-driving data and events, which could settle proceedings. However, if the underlying momentum continues to extend, a test of 1.20 should be possible.

Beware that holiday-thinned market conditions also make for low liquidity, which can prompt some unusually large moves.

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

Ahead of a test of 1.20, we are seeing some buying interest at the horizontal support area at 1.2030; we drew this 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.

We already saw such buying interest emerge on Monday, and we wonder if it can provide a near-term floor ahead of any resumption to the 1.20 round level we mentioned.

Although the Bank left interest rates unchanged last week, three of the nine-member Monetary Policy Committee (MPC) voted to cut them, which suggested that the MPC would likely cut again in 2025.

The statement released by the MPC revealed a concern over the slowing economy, which could use the support of lower interest rates.

Bank of England Governor Andrew Bailey said on December 05 that he thinks four rate cuts are appropriate in 2025, and we think the outcome of last week's event would verify that.

The market entered the previous week expecting a mere two full 25 basis points cuts, 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.

An original version of this article can be viewed at Pound Sterling Live

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