Pound-to-Euro Forecast Sub-1.11 at Mizuho
- Written by: Gary Howes
Image © Pound Sterling Live
February rate cut risks are underappreciated.
The pound to euro exchange rate is set to fall by a notable margin over the coming weeks and months shows a new analysis from Mizuho.
The bank's global investment banking arm says sterling's losses will be driven by a Bank of England that will cut interest rates more aggressively than markets anticipate.
In fact, the slowing UK economy will trigger another interest rate cut at the Bank of England as early as next month.
"The BoE could deliver another 5-4 vote for a cut in February," says Jordan Rochester, FX analyst at Mizuho.
Current market pricing shows investors are completely unprepared for a cut in February, meaning a cut would be a surprise that would trigger a noticeable market reaction.
With the pound to euro exchange rate having recovered steadily since November to reach a high of 1.1563, there's ample space for retreat. In fact Mizuho's latest FX forecasts show the bank's year-ahead forecast profile is well below consensus.
Rochester explains that the Bank of England's Monetary Policy Committee is evenly split between those willing to cut and those willing to hold on account of inflation still being elevated.
Compare Currency Exchange Rates
Find out how much you could save on your international transfer
Estimated saving compared to high street banks:
£25.00
Free • No obligation • Takes 2 minutes
However, "CPI avoided the painful 4% level and has fallen sharply since. The good news is that is likely to continue in our view," says Rochester.
Labour market data released this week confirmed unemployment is rising and wages are slowing, which could convince some members of the MPC to switch to favouring rate cuts.
"Labour market slack is clearly building," says Rochester.
Above: GBP/EUR at weekly intervals.
Mizuho thinks the February cut will be followed by moves in April and July, taking Bank Rate toward the mid-point of neutral at 3% (range is 2.25–3.75%).
"With the USD on the back foot and global growth momentum improving, GBP is positioned to outperform but a dovish BoE outlook holds it back vs EUR and JPY. We expect EUR/GBP to drift toward 0.92 by Dec-26, while GBP/USD holds around 1.31 to 1.33 through 2025–26," says Rochester.
EUR/GBP at 0.92 gives a GBP/EUR conversion of 1.0870.
