The Pain Isn't Over: UniCredit see Sterling Falling to 1.11 Against the Euro

Pound Sterling has started to come under pressure once more against the Euro having fallen back into the 1.16's having been as high as 1.19 earlier in the month.

There is not necessarily anything wrong with the Pound, if anything data has been quite supportive and headlines concerning Brexit have been sanguine.

Rather, the driver of the declines in the GBP/EUR exchange rate from recent inter-bank market highs at around 1.19 to the present 1.1630 appears to be purely the result of the Euro's broad-based re-rating.

Traders are turning increasingly positive on the Euro with data showing the majority of speculators are now betting that the EUR/USD exchange rate will now rise.

Consider this - for the last two years the majority of the trading community has been against the single currency; this is a notable development for the Euro and hints that momentum is swinging in its favour.

“The margin for a stronger appreciation of the common currency remains wide,” says a note from analysts at UniCredit Bank SpA. “EUR/GBP has also rebounded, close to 0.86.”

On balance, this picture of is well in line with UniCredit’s medium-term view in favour of a further correction of USD overvaluation and a stronger Euro with the Pound also seen fading.

Indeed, we have recently reported that other notable analyst names in the industry are warning the Pound is trading at overvalued levels.

Upgrading Forecasts for the Euro

UniCredit have told clients in a note released May 17 that they are upgrading their forecasts on the Euro largely on evidence that the Eurozone economy is recovering at a more convincing pace.

“The faster, more sustained and more balanced euro area recovery (together with the decline in the region’s political risk premia) are increasing the attractiveness of euro-denominated assets,” says Dr. Vasileios Gkionakis, Global Head of FX Strategy at UniCredit Bank London.

They believe this recovery should convince global investors to send capital towards Euro-denominated assets while European Central Bank policy should become more favourable.

Indeed, this week’s spike in the value of the Euro has largely been attributed to markets expecting a shift in stance at the ECB.

>> Update: Best international payment rate on GBP vs EUR now seen at 1.1529, banks seen offering in region of 1.1227-1.1308. Details here.

The Pound “More Likely than Not to Weaken from Here”

The balance of risks for Sterling are meanwhile seen pointed lower.

“Although we see hardly any reason to turn bullish on Sterling for the next few months, it now looks like the exchange rate (especially cable) has found more support than we previously expected,” says Gkionakis.

In UniCredit’s view, this outperformance in Sterling is largely due to the Dollar factor (as EUR/GBP has shrugged off the losses it incurred on the back of the snap UK election announcement).

“We still think that it is more likely than not that GBP/USD will weaken from here – as, in our view, the market moved to price in positive developments on Brexit negotiations far too soon – but at a moderate pace (due to the weaker Dollar),” says Gkionakis.

New Forecasts for the Euro Against the Pound and Dollar

UniCredit are forecasting the EUR/USD exchange rate to target 1.14 and 1.18 for end-17 and end-18, respectively.

The EUR/GBP could further appreciate, in their view, towards 0.90.

From a Pound to Euro exchange rate this equates to 1.11. By the end of 2018 the EUR/GBP is seen at 0.89 which equates to 1.1236.

“We see EUR/GBP rising towards 0.90 by the end of this year – in line with real rate differentials – and staying at this level throughout 2018,” says Gkionakis.

If UniCredit are right then those hoping for a stronger Pound against the Euro are in for a long period of frustration.

Consumers Spend, Sterling Goes Higher

A surprise consumer spending=spree proved the elusive ingredient to hoist the pound through key resistance to its strongest in nearly 8 months against the US Dollar.

Despite headwinds of rising inflation and tepid wage growth, consumers stepped up spending as retail sales soared some 2.3% in April, well above forecasts of a 1% increase, after a 1.4% decline in March.

"Sterling rallied in relief but the boost to the British currency could prove momentary since economic headwinds and Brexit uncertainty could weigh on consumer spending in the months ahead," says analyst Joe Manimbo at Western Union.