Pound to Euro Exchange Rate Could Be On Course for 1.11: ING

The impact of higher mortgage rates and an incoming series of Bank of England interest rate cuts leaves analysts at ING Bank predicting a gradual slide is on the card for the Pound against the Euro.

However, a new monthly exchange rate forecast note from the international lender and investment bank shows the UK currency is set to be better supported against the U.S. Dollar.

ING says the UK economy will face increasing headwinds over the coming months as the full squeeze of higher interest rates at the Bank of England constrains consumer budgets.

“The UK homeowner faces greater headwinds from higher mortgage rates as they slowly work through the system. Here the average rate on the UK mortgage stock is now 3.0% and will rise to 4.5% through 2024 as refinancing goes through,” says a note from ING.

The Euro is meanwhile expected to outperform into year-end, thus forming “a gentle upside bias for EUR/GBP,” say analysts.

ING Bank’s forecasts for Pound-Euro are more ‘bearish’ than those held by a consensus of economists as well as investors’ expectations as implied by market forward curves; both measures hold a flatter forecast profile for the Pound against the Euro.

Aiding the case for the call is the Bank of England, which ING expects to cut interest rates by up to 100 basis points in 2024, something the market is not yet expecting and therefore poses “downside implications for the Pound”.

“Barring some big upside surprises to the inflation and wage data published on October 17/18th, we think policy will be left unchanged at the November 2nd meeting and the cycle will be over. Investors still price 18bp of further BoE tightening, which suggests sterling can drop a little when this is priced out,” says ING.

Analysts at the bank expect EUR/GBP to “bump up a little higher this year as the last vestiges of the BoE tightening cycle are priced out. And our call for 100bp of BoE easing in 2024 (not priced now),” says ING.

ING forecasts Euro-Pound to hit a high of 0.90 in 2024, which equates with a Pound to Euro exchange rate reaching a low of 1.11.

ING expects the Pound to be better supported against the Dollar, helped by up to 200 basis points of cuts that are expected from the Federal Reserve in 2024, more than double that expected from the Bank of England.

“GBP/USD should find support at the lower end of this 1.20-1.30 range,” says ING.

The downside forecasts for Pound-Euro put ING in the same bracket as the likes of Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS) and JP Morgan, all of which are predicting a notable decline in the exchange rate.

However, not all institutions are as bearish: according to Bank of America (NYSE:BAC) Merrill Lynch, the British Pound looks set to reboot its rally against the Euro and Dollar over the coming months.

Economists at the Wall Street bank expect the Bank of England to keep interest rates at current – or potentially higher – levels for an extended period.

At the same time, central banks in the U.S. and Eurozone will begin cutting rates by as early as mid-2024, creating divergent conditions in monetary policy that can result in downside in the Euro and Dollar.

This creates an apparent central bank policy divergence that would weigh against the Euro while maintaining support for the Pound.

“We remain of the view the BoE won’t help GBP much near term, but a “high for longer” BoE could help GBP vs EUR later — we see EURGBP at 0.85 through our forecast horizon,” says Michalis Rousakis, an analyst at Bank of America.

Rousakis and colleagues look for the first rate cut from the Federal Reserve in June 2024. Importantly, they look for quarterly 25bp reductions in the policy rate, for a total of 75bp of rate cuts in 2024 and 100bp of cuts in 2025,” says Rousakis.

This should result in GBPUSD rising to 1.24 by year-end 2023 and 1.35 by year-end 2024.