Euro to Pound (EUR/GBP) Exchange Rate Forecast to SUFFER Further Declines

However, enthusiasm for the pound is in short supply at present and we would not expect any significant deterioration in the EUR/GBP's prospects for now.

At the time of writing:

• The euro pound rate is 0.03 pct higher at 0.7928.
• The pound to euro exchange rate is therefore at 1.2615. Consider that this week's high was at 1.2700 and we get a sense of where current direction lies

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A week of two halves for pound to euro

Sterling has had a difficult week losing ground against most currencies and just about holding its own against the euro.

Analyst Carl Hasty at Smart Currency Business says:

"Sterling’s path against the euro was a week of “two halves” with sterling pushing to a 23 month high against the euro prior to the release of the Bank of England minutes on Wednesday mornings and then proceeding to fall back to the weeks starting level by the end of play on Thursday.

"The main reason for sterling’s weakness was the content of the latest minutes from the Bank of England which highlighted their concern that an early interest rate hike could harm the UK’s economic recovery."

Short-term GBP weakness

The Bank of England MPC Minutes released this week revealed the interest rate decision makers voted unanimously to leave monetary policy unchanged.

With nothing particularly hawkish from the minutes, the mildly corrective tone in GBP resumed.

Market focus will turn to UK retail sales on Thursday. The market is expecting a slight rebound of 0.3% m/m after the drop in May.

"But given the sentiment towards GBP has softened recently, the absence of an upside surprise today will likely see GBP continue trade with a heavy tone, but we suspect downside will be limited ahead of tomorrow’s first estimate of Q2 GDP," say Lloyds Bank Research.

Long term favours the British pound against the euro

It all comes back to fundamentals; a credible private survey from Ernst and Young revealed on Monday that the UK economy would grow by 3.1% this year, the fastest growth of all G7 countries.

"With growth forecasts being revised upwards and increased speculation that the BoE will almost certainly tighten policy sooner rather than later, we expect this week's first Q2 GDP release to have a big bearing on the level at which we will see sterling trade against its developed economy peers in the near term," says analyst Kamil Amin at Caxton FX.

Weighing on the euro is global market sentiment which continues to weaken in the near term as fighting continues in Gaza and tensions in Ukraine remain high.

If and when we see the current geopolitical situation resolved, we should see some added risk appetite start returning to global markets and aiding the euro which is perceived as being something of a risk-on punt at present.

On the data front: Eurozone surplus shrinks

The current account surplus in the eurozone narrowed in May from a revised surplus in the previous month.

This was despite the market expecting the surplus to widen. With the relative value of the euro remaining high, it is clear that exports are being affected and as a result weighing in on growth.

"With no data releases out of the eurozone today, we expect the GBP/EUR rate to remain vulnerable to further sterling upside pressure," says Amin.

UK public sector borrowing disappoints

Not all is rosy when it comes to the UK economy at present. While growth is heading in the right direction the UK's public finances remain poor.

"Public Sector Net Borrowing figures showed a bigger deficit than expected at 9.5BN vs. 9.2BN eyed. More importantly the prior month's results were all revised to show higher than expected deficits suggesting that despite the strong growth in UK economy fiscal spending remains a serious problem. UK public sector net debt ex financials now stands at 77% of GDP - the highest on record," says Boris Schlossberg at BK Asset Management.

We see concerns around UK debt as something that would hurt the pound to euro exchange rate from a longer-dated perspective.

Hopefully the effects of the recovery will soon start to be felt in the nations finances as less demand on unemployment benefits combine with higher tax receipts.