GBP's strength against the EUR has waned from its peak in 2024, but analysts at Barclays and Julius Baer remain steadfast in their forecasts of a resurgence in GBP to new heights. The GBP/EUR pair has dipped from levels just above 1.17 to around 1.1650 after two consecutive weeks of decline, driven partly by a softer-than-expected UK inflation release and the outcome of the March Bank of England policy meeting.
The likelihood of a June interest rate cut by the Bank of England increased as Mann and Haskel withdrew their support for further rate hikes, with the Bank indicating it could reduce rates without risking inflationary pressures. If expectations for a rate cut in June diminish in response to incoming data, the Pound could regain ground lost after the Bank of England meeting.
Our primary scenario still anticipates GBP strengthening against the USD throughout 2024, approaching the $1.30 mark. However, if UK economic momentum slows alongside a sharper decline in UK inflation, the likelihood of a May rate cut by the Bank of England (BoE) could rise. Under such circumstances, GBP could face downward pressure, potentially revisiting the lower $1.20 range. The main risk to our primary scenario arises if there is a resurgence in US economic momentum, coupled with persistent inflation, prompting the Federal Reserve to maintain higher rates for longer than expected. We are eagerly awaiting the latest US PCE price index report this Friday for further insights into the trajectory of Fed policy. A significant positive surprise could cast doubt on the June rate cut currently factored in by markets, potentially pushing the dollar towards fresh six-week highs against a basket of currencies.
EUR/USD is poised to register a 2% loss in Q1 2024 – its poorest year-to-date performance since 2021. The pair has remained within the broader range of $1.0500 to $1.1100 for nearly 14 months, and unless unexpected US data emerges, significant movements are improbable. Notable events today include German unemployment figures and the Eurozone's lending reports, though these are likely to be overshadowed by the US final GDP print scheduled for later today. Meanwhile, Friday’s US PCE report poses a risk if the outcome significantly deviates from expectations, especially considering that most markets will be closed for the Easter break. Among other EUR pairs, EUR/SEK has climbed to a fresh four-month high following hints from Sweden’s Riksbank suggesting a possible cut in borrowing costs in May or June if inflation prospects remain favorable. Furthermore, EUR/CHF is trading at its highest level in almost eight months and is set for its eighth consecutive weekly gain, marking its longest winning streak since 2003, following last week's surprise rate cut by the Swiss National Bank.
