British Pound Euro Exchange Rate (GBP/EUR) Forecast and Analysis: Why is the GBP Heading Down and the EUR Higher?

The British pound (GBP) is meanwhile struggling after the Bank of England warned markets not to expect an interest rate rise any time before Spring 2015.

Ahead of the new week the pound to euro exchange rate (GBP/EUR) is quoted at 1.2462.

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The euro rate today: Relief on latest inflation data

The big test for the euro exchange rate complex today comes in the form of Eurozone inflation data.

The euro would have been hammered had it sunk below the forecasted levels. In the event Consumer Price Index (YoY) (Jul) came in at 0.4%, bang-on target.

Gross Domestic Product s.a. (YoY) (Q2) was also released and came in at 0.7%, in line with predictions.

We get the sense that traders will take this outcome as EUR-positive and could well buy the shared currency against the pound sterling as a result.

Concerns for German economy mount

The euro was hurt earlier this week when it was shown German investor confidence had deteriorated sharply.

Now, we have confirmation that the economy is actually contracting with GDP falling 0.2% from the first quarter, when it rose a revised 0.7%. 

The perpetually poor Frech economy meanwhile failed to grow, the situation is likely to get worse as the Ukrainian/Russian crisis starts to make its presence felt.

"Combined with Italy’s unexpected slide into recession, the German and French readings are likely to add pressure on the European Central Bank to expand stimulus," notes Daniel Sugarman, a market strategist with ETX Capital.

The British pound: Outlook turns murky

Kathy Lien at BK Asset Management gives us the the 7 reasons why the BoE Quarterly Inflation Report crushed sterling.

These reasons are worth grasping if you wish to know why the GBP is forecast lower in the near-term:

1. BoE Cuts 2014 Wage Growth Forecast to 1.25% from 2.5%

2. Says it will take 3 Years to Eliminate Economic Slack (Previous 2-3 Years)

3. Lowers Q3 GDP Forecast to 0.7% from 0.9%

4. No Comment on when Rates will Rise

5. Carney Cites "Heightened Uncertainty" in Economic Slack

6. Says previous forecasts were over optimistic

7. Provides no Threshold on Unemployment or Wage Growth

Forecasting a softer sterling to euro

We forecast the soft tone in the sterling euro rate to persist for the near-term as there are no significant data releases on hand to bring about a swift turn in sentiment.

Further declines would echo the weaker sentiment we have seen on GBP in late summer.

We note that the Relative Strength Indicator on the GBP/EUR weekly charts (long-term) is now at 58 - anything at or above 60 indicates overbought conditions.

50 is neutral and is a more sustainable reading as it suggests there is no threat of an immediate correction.

The move lower in GBP/EUR could thus actually be a positive for those holding out for better sterling rates in the longer-term as the gradual rise seen through much of 2014 should ultimately continue.

However, we would be concerned should the rate break below 1.23 as this could suggest the upward channel has been broken.