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Pound's outlook: Analysts predict EUR/GBP decline



Pound's outlook: Analysts predict EUR/GBP decline

The current investment landscape is displaying a growing interest in assessing the vulnerability of the British pound. Analysts from various institutions have delved into the technical outlook for the EUR/GBP currency pair. MUFG Bank predicts that following the Bank of England's decision, the EUR/GBP exchange rate is poised to decline, breaching the 0.85 barrier, which represents the lowest point in 2023. ING economists also foresee a strengthening of the pound against the euro, driven by the contrasting policies of individual central banks.


Since late December 2023, the quotes for EUR/GBP have been following a robust downtrend, aiming towards the psychological barrier of 0.85. While this support successfully restrained sellers in both July and September 2022, MUFG Bank analysts are skeptical about a repeat scenario this time around.


Market dynamics appear to be influenced by expectations concerning interest rate cuts and the economic conditions of individual nations. In December, the consensus in the market predicted over six interest rate cuts in the UK, starting from the May meeting.



However, the current probability of a May cut stands at only 50%, with a total of four cuts being estimated, contingent on prevailing data.


Despite the European Central Bank (ECB) keeping interest rates unchanged at 4% on January 25, 2024, in line with market expectations, the market has not altered its perspective on the April interest rate cut.


In its official statement, the ECB emphasized its determination to combat inflation, omitting any mention of potential interest rate cuts. However, challenges for the euro arose from Christine Lagarde's comments following the decision.


Conversely, the Bank of England has remained tight-lipped about its future monetary policy, providing markets with an opportunity to engage in speculative discussions favoring a more assertive stance.



Comparatively, the Bank of England appears to be exercising greater caution than other central banks when it comes to endorsing interest rate cuts. Both the Federal Reserve and the European Central Bank have hinted at the possibility of such cuts. However, the Bank of England has not followed suit, refraining from making statements in the December meeting that could be misinterpreted as support for the market's anticipation of rate cuts.


Committee members have largely remained silent since then. However, sustaining the 'higher for longer' stance on interest rates is becoming increasingly challenging as the backdrop of inflation shows signs of improvement.


Notably, the Bank of England has linked the likelihood of interest rate cuts to three variables, one of which is the strength of the labor market. Yet, data in this regard are marred by well-known credibility issues, effectively boiling down to service inflation and private sector wage growth, as highlighted by ING experts.



Analysts are of a similar sentiment, suggesting further selling of the EUR/GBP pair due to divergent economic expectations. As the market has already factored in the worst-case scenario for the UK, its currency should benefit from positive surprises with slightly improved readings.

Maintaining a bullish outlook for the USD, experts anticipate that if the GBP responds to a less dovish than expected Bank of England policy update, there is room for EUR/GBP to extend its current downward trajectory.


The currency pair is approaching the 2023 low at 0.8493, and a breakthrough at this level is expected to expedite a return to the 0.8400 level last observed in August 2022. Analysis of positioning strongly suggests the possibility of further GBP buying, according bank experts.


eurgbp daily chart, forex analysis
EUR/GBP, daily chart, MetaTrader, 29.01.2024

29.01.2024



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