Pound to Euro exchange rate today: 1 GBP = 1.1047 EUREuro to Pound Sterling exchange rate today: 1 EUR = 0.9051 GBPForeign exchange analysts at Danske Bank have downgraded their forecasts for the Pound v Euro exchange rate.

The decision to lower expectations on Pound Sterling at one of Europe’s largest financial services providers follows the market’s dovish interpretation of the Bank of England’s August policy meeting and Quarterly Inflation Report which gave little suggestion that the Bank is in the mood to raise interest rates in 2017.

Money market pricing suggests there is now a ~30% chance of a November interest rate rise.

“We still view the core of the Monetary Policy Committee (including governor Mark Carney) as being tilted to the dovish side,” says Mikael Olai Milhøj, Senior Analyst with Danske Bank.

Markets were wrong-footed in that they expected the Bank to deliver a signal that an interest rate rise might still be alive.

That only two out of eight members of the Monetary Policy Committee opted to vote for an interest rate rise saw markets recalibrate expectations and the British Pound dip.

Sterling fell below the key 1.11 level against the Euro in the process.

Furthermore, the Bank of England cut their 2017 growth forecast to 1.7% from 1.9% previously.

Danske Bank believe the Bank of England is actually still being too optimistic with regards to their economic growth forecasts which is surely likely to weigh on the Pound going forward:

“We still expect the BoE to remain on hold until the Brexit negotiations are concluded in Spring 2019. The main reasons are that we think the BoE is still too optimistic on both wage growth and GDP growth and political uncertainty remains high due to Brexit.”

This leaves markets appearing to be a little too much on the bullish side when it comes to the Pound as shown by the below:

As can be seen a full 0.25% interest rate rise is expected by markets by the end of 2018. If this is not delivered, owing to a still-sluggish economy, Sterling could have to adjust yet lower.

"We think the BoE is still too optimistic on wage growth and hence underlying inflation, which is one of the reasons why we do not think the BoE will hike soon," says Milhøj. "That said, higher wage growth remains one of the triggers for a more hawkish BoE."

Others agree.

“The Bank of England MPC voted 6-2 to keep rates on hold as expected, and revised their growth forecast down to 1.7% y/y in 2017. In our view, this revision is likely going to prove too moderate. A likely further downward revision in the next Inflation Report (November) should lead pricing for rate hikes to unwind further still and for the GBP to come under pressure towards the end of the year,” warn analysts at BNP Paribas, the French investment bank.

Of course this could all change if the Brexit story becomes more positive - i.e what steps will the UK and EU take to ensure Brexit is not disruptive, and will enough progress on negotiations be made to give businesses the confidence to make investment decisions.

Watch the release of employment and wage data on Wednesday, August 16 for further developments on this particular front; this will be the most important data for Sterling to contend with for the remainder of August.

Also watch employment data on Tuesday, August 15 as this also plays into the wage equation - when unemployment stabilises wages tend to start rising.

The Bank of England projects that the unemployment rate will stabilise around 4.5%.

"The combination of higher inflation and lower unemployment was one of the reasons why the BoE turned more hawkish in June/July," notes Milhøj. Improvements in employment data will prove to be another potential upside risk for Sterling going forward.

Danske Bank's Forecasts for the Pound to Euro Exchange Rate

A 5bp decline in 2Y UK yields due to a further postponement of market expectations for the first BoE rate hike, will (everything else being equal) push EUR/GBP 0.1-0.25% higher, according to their models.

Danske lift their 1M and 3M EUR/GBP targets to 0.91 (previously 0.88) expecting the cross trade within a narrow range of 0.90-0.92.

This gives a Pound to Euro exchange rate at 1.11-1.0870.

Over 3-12M, Danske Bank continue to see some stabilisation in GBP, expecting EUR/GBP to drift back below 0.90 on the back of potential for some clarification regarding Brexit negotiations and valuations.

“However, as relative growth and relative monetary policy is expected to remain EUR/GBP supportive in the medium term, we see only modest downside potential in the year ahead,” says Milhøj.

Danske target 0.90 in 6M (previously 0.88) and 0.88 in 12M.

EUR/GBP at 0.90 = 1.11 in GBP/EUR and 0.88 = 1.1364.

“Given the high political uncertainty due to the British government’s weak parliamentary majority, we expect EUR/GBP to remain volatile and we generally recommend investors and corporates hedging GBP assets/income to maintain a high hedge ratio,” says Milhøj.

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