Pound-to-Euro Week Ahead Forecast: Recovery Mode on Brexit Hopes, Looming ECB

- GBP/EUR near major technical supports.
- Scope to recover on Brexit optimism
- ECB looms over EUR.
- GBP/EUR may see 1.14+ on Brexit deal.

Image © Adobe Images

• GBP/EUR spot rate at time of publication: 1.0999
• Bank transfer rate (indicative guide): 1.0713-1.0790
• FX specialist providers (indicative guide): 1.0883-1.0899
• More information on FX specialist rates here

The Pound-Euro exchange rate remains supported and could look to recover in the coming days as hopes of a Brexit deal being agreed by mid-November solidify and as the European Central Bank (ECB) seeks to head off another advance in the Euro at Thursday’s policy meeting. 

Pound Sterling had been the best performing major currency of the week until it came undone on Friday, suffering heavy losses against all major counterparts despite reports suggesting a French compromise could be near on fisheries and an optimistic tone from a government minister in London. 

The Pound had been lifted on Wednesday when both sides acknowledged that trade negotiations would resume following a brief hiatus at the instigation of Prime Minister Boris Johnson, with Sterling further heartened by a suggestion from EU negotiator Michel Barnier that fisheries remains the only area of significant disagreement. 

There’s barely three weeks to go before the de facto deadline in mid-November but the improving tone of negotiators and political leaders on both sides has seen analysts and investors becoming less pessimistic on the prospects of the Pound, with some even suggesting now is the time to buy it in anticipation of a deal. 

Intensive talks are set to continue in London this week. 

"There are a growing list of negatives for the outlook, including the rise in virus cases in Europe and lockdowns in UK regions, but the market has so far shrugged them off,” says Jordan Rochester, a strategist at Nomura. "We still expect a deal to perhaps provide a 'buy the rumour, sell the fact moment' and GBP to underperform in the medium term. But we believe now is the time to buy into the potential for a last-minute deal before mid-November and with it we expect a higher GBP in the short term at least."

Rochester and the Nomura team advocated to clients last week that they use options to bet that the Pound-to-Dollar rate rises as far as 1.35 in the next month, which has bullish implications for the Pound-Euro rate. 

Above: GBP/EUR at daily intervals with Fibonacci retracements (supports) of March recovery, moving-averages. Protect your international payments budget by locking in today's exchange rate for future use, learn more here.

Even in the possibly-unlikely event that Europe’s single currency returned to its earlier high of 1.20, a move to 1.35 by GBP/USD would still lift the Pound-to-Euro rate and as far as 1.1250. But if the ECB or other factors succeed in keeping EUR/USD around its Friday level of 1.18, then Sterling could rise as far as 1.1440 in the month ahead. 

Gains would be even larger if the Euro fell back below 1.18, although exactly what the happens to the Euro this week will depend on the outcome of Thursday’s European Central Bank meeting, which is of increased importance because of recent gains in Eurozone exchange rates that have further lifted the trade-weighted currency. 

"The ECB’s EUR Effective Exchange Rate (EER) is 0.5% stronger this week and the index has remained at elevated levels since a sharp rally in July. The index gained 3.4% in July into August and since the COVID crisis the EUR EER is 7.5% stronger," says Derek Halpenny, head of research, global markets EMEA and international securities at MUFG, of the trade-weighted Euro. 

ECB policymakers had been hostile to the rising Euro in early September when the coronavirus was still largely contained on the continent, fearing for its inflation target and the economic recovery given that significant currency strength can stifle both inflation and export competitiveness.

But since then second waves have grown to be larger than the first, leading to renewed restrictions on activity while placing a question mark over economic recoveries. 

In addition, the Euro-to-Dollar rate closed its strongest week since late July on Friday which, taken together with the  -0.25% decline in the Pound-Euro rate, lifted the trade-weighted Euro and likely much to the consternation of the ECB.

Above: Euro-to-Dollar rate shown at weekly intervals.

It’s not clear exactly what ECB President Christine Lagarde and colleagues could do about the Euro on Thursday, although they might be likely to at least attempt to engineer a lower EUR/USD, which would be supportive of the Pound-to-Euro rate.

“While a trade deal between the EU and the UK would likely trigger a relief rally in the pound we expect a move to be half-hearted. The risk that a deal would lack the comprehensiveness that had once been hoped for, combined with the vulnerable nature of the UK economy and the weak popularity levels of the PM suggest that GBP will still face several hurdles next year,” says Jane Foley, a senior FX strategist at Rabobank. 

Brexit optimism and a ‘dovish’ European Central Bank could help to lift the Pound off the 1.10 level this week but Rabobanl’s Foley says there’s little prospect of it being able to advance beyond 1.1363 in the weeks ahead even if a Brexit deal is announced. If you would like to automatically book your idea rate when it is reached, learn what tools are available to do so.

Others doubt Sterling will rise at all, and are instead looking for the Pound-to-Euro rate to break below 1.09 in the coming weeks, aided by both Brexit uncertainty and a deteriorating coronavirus situation. 

Above: Pound-to-Euro rate shown at weekly intervals .

“A new lockdown in yet another major city bodes ill for economic growth and may well presage a further shift to a national lockdown in the near future,” says Shahab Jalinoos, head of FX strategy at Credit Suisse. “The upshot is that we still see no reason to change our view that EURGBP should gravitate to 0.9200 while Brexit talks proceed, with GBPUSD still a sell above 1.3000. Given the government’s general approach to emotive talks, the odds of talks being concluded in a manner that rules out more apprehension and misunderstandings before a conclusion seem slim still.” 

The calendar is devoid of market-moving economic numbers for Sterling this week, but both it and the Euro will be sensitive to coronavirus developments given that government responses to second waves of infection are threatening to bring about a final quarter economic contraction.

Friday’s IHS Markit PMI surveys showed sentiment across UK and European services sectors tumbling in October, although Europe’s composite PMI fell back below the 50.0 level that denotes the difference between expansionary and recessionary economic conditions.

The second wave of infection is another reason why the ECB could seek to coax the Euro lower this week, potentially supporting the Pound-to-Euro rate ahead of the weekend. 

“Western Europe's cases, hospitalizations and deaths continue to rise very rapidly, with near-vertical increases in cases in many countries in recent weeks,” says Ian Shepherdson, chief economist at Pantheon Macroeconomics. “U.K. cases are rising less quickly than in most of continental Europe, and the rate of increase has slowed marginally."

Above: Overview of UK Government's digital coronavirus dashboard.