Pound euro exchange rate shoots higher: Forecast 1.22 in near-term, 2014 predictions in sight

Short-term forecasts will now have to account for a return to form for the British pound following the sharp spike higher witnessed on Wednesday.

The British pound to euro exchange rate is trading 0.88 pct higher on a day-to-day basis having reached 1.2171 in early afternoon.

The sharp bounce off support at 1.2 will now see analysts readjust near-term forecasts as further upside potential is factored in. The return to strength confirms that the 2014 forecasts that see a notably higher GBP/EUR rate are on target to be reached.

We would forecast the 1.22 level will be retested in coming sessions.

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We have two elements impacting on the pound to euro exchange rate cross at present: 1) The Bank of England and 2) Talk of negative interest rates in the Eurozone.

Pound sterling supported by growth forecast upgrade at Bank of England

In a surprise upgrade in his growth forecasts, the Bank said it now expected the economy to grow by 3.4 per cent in 2014, up from a previous forecast of 2.8 per cent.

Governor Mark Carney said:

"If and when the time comes that the economy can sustain higher interest rates, Bank rate is expected to rise only gradually.

"For a sustained and balanced recovery, the degree of stimulus will need to remain exceptional for some time."

The Bank said it expected growth figures for the fourth quarter of 2013 to be revised up from 0.7 per cent to around 0.9 per cent.

Sterling: Bank of England to focus on the output gap

Trevor Welsh, Head of UK Sovereign and Inflation at Aviva Investors, has given his thoughts on the next 'big thing' in forward guidance - the productivity gap. He says:

"Everybody’s view of the output gap is different. Forward guidance with eighteen separate indicators will inevitably take us back to focussing on monthly meetings. Nobody will be sure of the time line for interest rates until the bank announces its interpretation of the myriad of evolving data it considers key to its decision making process.

"Carney’s reference to interest rates being at 2.0 per cent in three years’ time marks a sea-change in policy. He clearly expects interest rates to rise and it seems unlikely all the rate hikes will not occur in 2016/17.

"Effectively, the Bank of England is now looking at time well within its forecast horizon when emergency interest rates will no longer be necessary."

Euro exchange rates complex hit by talk of negative rates

The euro has meanwhile been torpedoed by talk of negative interest rates.

European Central Bank member Benoit Coeure, speaking to Reuters, said the idea of cutting into negative territory the rate the ECB pays banks to hold their deposits overnight was "a very possible option".

"That is something we are considering very seriously. But you should not expect too much of it," he said of a negative deposit rate.

Meanwhile, the ECB Member said "the status of the OMT is not changed" after German court decision.

Coeure doesn't see deflation in the euro zone, see inflation slowly rising back to 2%.

This afternoon Mario Draghi is up, and this could provide yet further turbulence for the pound to euro exchange rate.