GBP/EUR Exchange Rate Outlook: GBP Remains Preferred Over EUR, 1.2 Remains Supportive
- Written by: Gary Howes
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The Bank of England will be the driver of the pound euro exchange rate this week with the near-term outlook dominated by BoE's changes to Forward Guidance.
The British pound / euro exchange rate is trading 0.07 pct lower on Monday morning, 1 GBP converts into 1.2029 EUR.
We continue to see the technical outlook for this pair dominated by support at 1.2 - if it can hold then the longer-term uptrend scenario remains valid.
1 EUR converts into 0.8318.
Concerning the outlook for the euro pound exchange rate, "while resistance holds on closing basis at 0.8349, the cross remains vulnerable as bearish conditions persist. Support is at 0.8266 ahead of 0.8160," says Geoffrey Yu at UBS.
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Analysts at ICN give their short-term forecast for GBP/EUR confirming the 1.2 level is key (Note, the equation is flipped around here where the EUR/GBP is under scrutiny):
"The pair found strong resistance at 0.8340 which is the resistance of the main Falling Wedge shown on graph, supported by negativity on Stochastic and downside pressure from the MA 50, forcing the pair to fluctuate around 0.8285 once again.
"In general, stability above the latter keeps chances for the pair to revive positivity over intraday basis, and a breach of 0.8340 will push the pair toward 0.8410 then 0.8560 taking into account that a breakout below 0.8285 will force the pair lower to retest 0.8160 before attempting higher once again."
Today analyst Piet Lammens at KBC Markets has reaffirmed his positive bias on the outlook for the pound over the euro:
"We have a longer term sterling positive bias longer term as the BoE will probably tighten policy sooner than the ECB. EUR/GBP is captured in a gradual downtrend channel since mid 2013. Recently, we favoured short-term consolidation as some good news is already discounted and as some UK eco data were slightly less buoyant.
"Last week, the EUR/GBP cross rate tested the 0.8350 resistance as the ECB was less soft than expected. For now, the resistance held. We don’t change our LT sterling positive bias yet, but a break above the 0.8350 would be an indication that the correction has some further to go. 0.8405 is the next point of reference on the topside in EUR/GBP.
Outlook for the pound to euro exchange rate determined by BoE Inflation Report
The immediate outlook for the GBP/EUR exchange rate is predicted to be one of stability.
However, markets will come to life on Wednesday when the Bank of England releases their latest Quarterly Inflation Report.
Analysts note that, as is the case with the US Fed, the BoE will be squirming as the UK unemployment rate is falling faster than they anticipated.
While inflation may be falling the BoE continues to stress the economic recovery is not guaranteed and we need to see more robust growth head of an interest rate hike.
How this is all tied together and presented to markets will be key to determining whether the pound sterling can rally to the mid-.20's in 2014.
"Aside from providing their latest economic forecasts, the Monetary Policy Committee has oftentimes used the Quarterly Inflation Report to telegraph major changes in policy. They will need to update their forward guidance this quarter and they could either choose to abandon their unemployment rate threshold or lower it," says Kathy Lien at BK Asset Management.
Lien thinks tying monetary policy to the jobless rate was a big mistake for U.K. and U.S. policymakers and both should abandon this rule completely and move to something more qualitative to manage the market's expectations.
This option would create less volatility for their financial markets and the currency than a change in the level of the threshold.
