Pound Sterling + Euro Exchange Rate FORECASTS 2014: Will GBP and EUR Maintain a Positive Bias Going Forward?
- Written by: Rob Samson
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Recent weeks have seen both the euro and British Pound fail to extend advances against a recovering US dollar; however the GBP continues to creep higher above the key 1.22 mark against the euro.
For reference, the following forex rates are observed at the time of writing:
- The euro to dollar exchange rate is trading 0.07 pct lower at 1.3540.
- The euro pound exchange rate is 0.12 pct down at 0.8076.
- The pound to euro exchange rate is therefore at 1.2385.
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Euro exchange rate forecasts 2014: 'Ultimately lower'
"The fundamental outlook for the EUR is bearish; however, the first four months of 2014 were marked by strong EUR inflows that supported the currency," says Camilla Sutton at Scotiabank.
Entering June, flows and technicals are warning of a more bearish shift. Traders have flipped from being long to short EUR - as of May 20th the CFTC reported a $1.5bn net short position a significant change from the average net long position of $3.2bn held so far in 2014.
"In addition the flows into the European periphery market appeared to be slowing. On the fundamental side, concerns over low inflation, a softening in the growth outlook, constraints in credit markets and a relatively strong EUR are likely to bring ECB policy action. We expect ongoing depreciation in the EUR, with a below consensus year-end target of 1.30," says Sutton.
See our exchange rate forecast report from Barclays in which analysts warn that they see a lower EUR going forward for the remainder of 2014.
British pound forecasts 2014: Flows into GBP are favourable
The GBP rallied to a new high of 1.6996 in early May but failed to break above 1.70.
"The fundamental outlook for the GBP is relatively strong, as the BoE is poised to be the first of the G4 to hike interest rates and GDP is set to
outperform in the advanced economies," says Sutton.
Furthermore, flows into GBP are also favourable, with the CFTC reporting a net long position of $3.5bn. However in many ways the GBP is priced for perfection leaving it vulnerable to downside. We hold an above consensus year-end forecast of 1.67.
"An ongoing supermarket food price war and, possibly, power imported inflation will contain price gains over the coming months. However, we maintain our view that the risks are balanced in favour of monetary tightening by the BoE earlier than envisioned under our base case (first hike in 2015 Q1)," says Sutton.
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The wildcard for the pound sterling outlook: The Scottish Independence Referendum
While the UK economy continues to provide support, can the same be said about the political landscape? If anything, this is where the most potential uncertainty lies.
Scotiabank say:
"Following the European Parliament elections in May, in which the anti-European UK Independence Party garnered the largest share of the local vote, the next 12 months will remain busy on the political front with a Scottish independence referendum in September and a general election next May.
"The Scottish vote has become a closer call of late; we expect the ‘no’ camp to win, but there is likely to be considerable media hype and financial market volatility leading up to this ballot."
Euro dollar exchange rate forecast to head to 1.37
After Thursday's post-ECB sharp intraday reversal, EUR/USD retreated slightly on the back of weaker German industrial production and a mild post NFP dollar rally.
"The sell-off has not taken the currency pair below any key support levels and for this reason, we continue to believe that the currency pair could test 1.37 on the back of additional short covering and the expectation that the central bank will not take any additional action until they see how the economy reacts to their latest moves, which could be months later," says Kathy Lien at BK Asset Management.
The rally in European equities and turnaround in the euro indicates that investors were impressed by the central bank's radical measures and believe their active approach to monetary policy will be enough to stimulate growth.
"Also, Draghi's comment that interest rates are pretty much at their lower bounds means they are not considering additional rate cuts. So while the ECB maintains a dovish bias and made it clear that they are not done easing, for the time being investors perceive this week's announcements to be positive for the Eurozone economy and for the euro," says Lien.
