GBP/EUR Exchange Rate Forecast: GBP Now Targeting 1.18 as Momentum Returns to the British Pound

Update, 5th August 2013: The British Pound is now set to test 1.18 against the Euro courtesy of another month of positive economic data out of the UK. The sheer strength of the UK recovery is seeing traders price in a rate hike a great deal sooner than the Bank of England's ear-marked date in 2016.

The 11th of July proved to be a strong day for sterling with the UK currency finally able to advance against the European unit. Today we see the pound to euro exchange rate is flat - hard up against the resistance area of 1.16. For advances in GBP-EUR the bulls will be hoping this level can be cracked and maintained over the course of today's session.

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Fortunately for sterling there appears to be some short-term momentum which could aid an advance:


Sterling is Day's Best Performer


A great day was recorded by the British pound on Thursday. As Kathy Lien at BK Asset Management points out, the UK currency was the world's best performing currency:

"Not only did the British pound trade higher against the U.S. dollar, but it was the day's best performer.  Sterling held onto nearly all of today's gains, rising almost 1% against the greenback.  What was surprising about the move is the lack of catalyst.
"There was no U.K. economic reports or market moving comments from policymakers. Bank of England member Miles spoke this morning and all he talked about was the Funding for Lending Scheme.  

"He said FLS is an insurance against a sharp rise in funding costs and the reason why it hasn't been used extensively is because banks funding costs have declined since the program began in August of last year.

"U.K. Chancellor Osborne said the economy is still dependent on monetary stimulus and indicated that central banks are "very focused on communicating the future path of interest rates." While he didn't mention the BoE specifically, Mark Carney's decision to provide a detailed statement after last month's monetary policy meeting indicates that he wants more transparency for the central bank and to provide more guidance to the market."


Longer-term forecast: Euro tipped to strengthen against the pound


We hear from UniCredit Bank today who have issued their weekly currency forecasts which suggest sterling is likely to come under pressure.

"In developed markets, we find that JPY is the currency most likely to weaken, while EUR-CHF and EUR-GBP will likely strengthen," says Dr. Vasileios Gkionakis, Global Head of FX Strategy at UniCredit Bank.

According to UniCredit's analysis the currency pairs most likely to benefit from higher equities and higher yields are EUR-GBP and EUR-CHF.

"We welcome these findings as they are completely in line with our fundamental views, which see the JPY lower, and EUR-CHF, EUR-GBP and EUR-JPY higher," says Armin Mekelburg, FX Strategist at UniCredit.

The British pound is forecasted to remain constrained by events concerning the Bank of England and its new governor Mark Carney.

Mekelburg says that with regards to the first BoE minutes under Mark Carney’s mandate a dovish rhetoric is expected, paving the way for an announcement of a forward guidance at the August meeting and suggesting that QE remains definitely on the table should more stimuli be warranted.

"Although UK inflation is expected to accelerate to 2.9% yoy and retail sales are likely to show a 0.5% increase in June, the net balance is thus expected to be negative for sterling, with cable seen drifting back towards 1.50. In turn, EUR-GBP is likely to further struggle mostly above 0.8650, with investors also preparing for the key UK GDP data for 2Q13 on 25 July," says Mekelburg.

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