Pound-Euro Headed for Sub-1.14 Says Julius Baer

The British Pound has risen against the Euro over recent days, but the advice from one leading Swiss bank is to temper any growing enthusiasm for an outright rally.

According to Julius Baer, the private Swiss bank, the Pound to Euro exchange rate will likely fall below 1.14 as UK economic data disappoints, with risks to this forecast tilted to the downside.

The call follows the Bank of England’s November interest rate decision and policy guidance confirming that UK interest rates will remain elevated for many months.

The British Pound was broadly supported in the wake of the Bank’s latest guidance and recorded a gain of just over half a per cent last week, with the lion’s share of the move recorded on Friday, when global markets rallied in an euphoric reaction to news U.S. employment numbers came in below expectations.

The Pound, considered a ‘risk on’ currency relative to the Dollar and Euro, can therefore benefit further if global markets reflect improved sentiment.

The Pound-Euro exchange rate saw some follow-through action to go as high as 1.1560 on Monday, although the gains have since been given back at the time of writing, confirming upside progress will remain hard to come by for a pair that remains relatively subdued.

In fact, David Alexander Meier, an economist at Julius Baer, reckons the downside should be favoured as UK-specific factors leave him predicting a softer Pound against the Euro into early 2024.

Meier says further UK interest rate rises are unlikely as inflation has receded from the peaks that triggered the cost-of-living crisis. “Inflation pressure is receding, and the BoE expects its 2% inflation target to be met by 2025.”

“It is likely that the BoE is also concerned about the weak economy, as surprisingly robust growth from earlier this year, when the UK dodged an anticipated recession, has abated,” he adds.

Julius Baer economists expect this Friday’s quarter-three GDP report for the UK will confirm the economy rained flat, and leading indicators point to a contraction in the current fourth quarter.

“The central bank expects a flat 2024, which will be deflationary. Overall, large upside surprises would be needed for the conditions for further rate hikes to be met,” says Meier.

Julius Baer says the economic outlook means the Bank of England is done with hiking and will hold rates unchanged until mid-2024, with downside risks should the UK enter a recession.

Should the market bring forward rate cut expectations, recent history shows this can result in Pound Sterling weakness.

“The pound sterling has eased from stronger levels earlier this year, when rising rates and the surprisingly resilient economy were supportive and markets priced in two more additional hikes up to 5.75%. These have been priced out now, and the pound has trended lower,” says Meier.

Julius Baer’s three-month forecast anticipates further weakening.

“Going forward, we expect the deteriorating economic backdrop to remain a headwind, while rate differentials remain constant given that the large peer central banks are also on hold. We stick to our 12-month target of EUR/GBP 0.88 and see the risks rather skewed to the downside,” says Meier.

A EUR/GBP target of 0.88 gives a Pound-Euro forecast of 1.1360.