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Deutsche Bank: Pound-to-euro exchange rate may face "Trusted crisis" in 2024

2023-12-20

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Deutsche Bank says the pound-to-euro exchange rate in 2024 will be affected by the crisis triggered by former Prime Minister Liz Truss, with the pound expected to fall as low as it did against the euro in September 2022 when Truss introduced his controversial budget the lowest level.

This is the conclusion of Deutsche Bank's analysis. They believe that the slowdown in the British economy will prompt the Bank of England to cut interest rates in May next year and will lead to the depreciation of the pound.

Deutsche Bank analyst George Saravelos explains: “The timing and speed of central bank adjustments from raising rates to cutting rates will be a major influence on each currency in 2024.” In this regard, the pound will Influenced by the Bank of England, Deutsche Bank expects the Bank of England to cut bank interest rates in May, ahead of the Federal Reserve and the European Central Bank, both of which are expected to cut rates by mid-year.

Saravelos said: "Previous monetary policy tightening has clearly begun to affect the economy. House prices have begun to correct, but there may be room to fall further. The sharp slowdown in housing activity has also not yet been transmitted to the labor market, which in any case The weather is cooling down rapidly.”

Deutsche Bank's base case forecast is that the Bank of England will start cutting interest rates in May next year. The Fed and European Central Bank's easing cycle is expected to begin by mid-year.

In addition, analysts said that the UK's external account remains in a bad state, with the broad basic balance turning negative again.

Analyzing the chart above, Deutsche Bank says GBP/EUR has returned to levels associated with the recent crisis. (The purple lines indicate mid-year and year-end forecast levels).

"For EUR/GBP, we believe a move higher above 0.90 is possible and that as long as UK inflation remains elevated, the fair value of the cross will continue to rise," Saravelos said.

EUR/GBP is forecast to rise to 0.90 by mid-2024 and to 0.92 by the end of the year. The exchange rate last fell to this level when former Prime Minister Liz Truss sparked panic in financial markets by announcing an unfunded budget. level.

In fact, volatility has only been associated with crises, including the 2020 coronavirus outbreak, anxiety over post-2016 Brexit negotiations and the 2008 financial crisis. Therefore, for a currency that does not anticipate economic crises, this is a crisis-era level.

However, Deutsche Bank expects political factors to be a muted factor in the coming months.

Saravelos said: “We do not believe that the next general election (no later than January 2025) will be a significant risk event for sterling. Current polls suggest Labor will win a majority, but there is currently a split between the major parties on finance and There are no big differences on the Brexit stance.”

The above information is provided by special analysts and is for reference only. CM Trade does not guarantee the accuracy, timeliness and completeness of the information content, so you should not place too much reliance on the information provided. CM Trade is not a company that provides financial advice, and only provides services of the nature of execution of orders. Readers are advised to seek relevant investment advice on their own. Please see our full disclaimer.

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Deutsche Bank: Pound-to-euro exchange rate may face "Trusted crisis" in 2024

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