JPMorgan's Euro and Pound Forecast: "Trump Policies Will Weaken Euro, Target 1.25 for GBP/EUR"

After the U.S. presidential elections, the GBP/EUR exchange rate dipped below 1.1850 following the initial reactions to the UK budget but showed a strong recovery, rising to 1.2080, its highest level in 2.5 years.

JPMorgan (JPM) anticipates that economic developments likely to occur under the Trump administration will negatively impact the euro. The bank notes that the pound may trade at a premium to its fair value, which could justify sustainable gains in the GBP/EUR pair. In this context, JPMorgan points to a target of 1.25 for the GBP/EUR exchange rate.

Regarding the risks facing the Eurozone and ECB policy, JPMorgan holds expectations that the Trump administration, particularly considering the threat of more aggressive trade policies, will be adverse to the Eurozone economy. The bank predicts that the Eurozone's capacity to respond with a more aggressive fiscal policy is limited, and the burden of supporting the economy will fall on the European Central Bank (ECB). Consequently, the necessity for the ECB to support the economy through further interest rate cuts may lead to a weakening of the euro.

JPMorgan believes that the UK economy is less sensitive to American trade policies compared to the Eurozone, suggesting that the British pound could be more resilient against the euro.

How is the market reacting to the UK budget? According to bank analysts, despite the declines that began after the announcement of the UK budget, the losses experienced by the British pound against the euro are considered unjustified. Market participants assess that the decline in the pound post-budget is temporary and reflects an inadequate response.

JPMorgan further states that rising bond yields in the U.S. will also elevate yields in the UK, supporting the pound. This signifies the potential for a favorable movement for the pound in the GBP/EUR pair moving forward.