Pound Euro Forecast: Exchange Rate Struggles In Final Sessions of Week But Outlook Remains Positive

However, longer-dated forecasts for the pound euro exchange rate suggest further gains lie ahead with an attempt of 1.28 being possible.

At the time of writing the pound to euro exchange rate (GBP/EUR) is trading 0.15 pct lower on a day-to-day basis having reached 1.2652.

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The pound popped higher on Tuesday as UK inflation surprised with much hotter than expected reading putting further pressure on the BoE to normalize interest rates sooner rather than later.

UK CPI rose 1.9% versus 1.6% eyed - its biggest month over month gain in more than a year.

The pound euro forecast: Further gains are possible

Current GBP/EUR strength comes after weeks of euro stubbornness with speculation that the Chinese central bank is one culprit continuing to buy the euro as it diversifies away from the greenback.

One will nevertheless struggle to argue that the outlook does not favour further GBP gains at this stage with longer-term momentum studies showing the path of least resistance is up.

Backing this call is Bill McNamara at Charles Stanley who has the following forecast for the pound euro:

"The UK currency also traded in a tight range last week, at the end of which is was just fractionally lower against the euro.

"Its latest price action suggests that it has entered a period of consolidation following its head-long charge up to 1.26 and this could yet result in a degree of profit-taking before it is in a position to push higher again. The medium-term upside target is still 1.28."

Markets firm at start of new week

Helping the euro at present are stronger markets which have managed to push higher after a poor week past.

"Global markets continue their recovery, holding onto early morning gains after the unpleasant selloff last week. Banking stocks recovered from their steep losses caused by worries about the state of Portugal’s banking sector. US stocks futures are indicting a higher open for US equities on increased takeover activity and better-than-forecast earnings from Citigroup," says Lee Mumford at Spreadex.

The FTSE was also helped by shares in Shire which advanced after they announced they are ready to recommend a new offer from AbbVie.

AbbVie, which wants to buy Shire to cut its tax bill and diversify its product line-up, made the offer of £53.20 pounds per share on Sunday.  Shire’s shares advance to mid-£49’s after closing at £48.70 on Friday.

This week we will really see the earnings season underway with large blue chips reporting their quarterly earnings.

"Citigroup Shares jumped after they beat consensus forecasts for second quarter earnings. The bank also reported they would pay $7 billion to settle claims regarding sales of mortgages before the financial crisis, helping pre-market shares advance 3.7%," says Mumford.

We expect any dips in the pound euro exchange rate to be shallow despite the improving market sentiment being witnessed at present.