Pound Forecasted Higher Against Euro With ECB Set to Deliver a 1 Trillion EUR Boost

The reason for this upside potential is the differing performance of the respective economies - the UK's economy is set to grow by more than 3 percent this year - faster than any other advanced economy.

The Eurozone is meanwhile teetering on the brink of recession. As a result the respective central banks are embarking on differing policy paths which will have significant impacts on the euro and British pound.

Where is pound euro now?

At the time of writing we see the British pound to euro exchange rate (GBP/EUR) is 0.19 pct higher on a day-to-day basis. The conversion rate is at 1.2828.

Beware: This is a spot market quote, your bank will affix a spread at their own discretion. However, an independent FX provider will seek to undercut your bank's offer, thereby delivering up to 5% more FX. Please learn more here.

The Bank of England: Positive for the GBP

Tightening interest rates are positive for a currency in that deposits deliver more return. As such internal flows, seeking out higher yield, bid up a currency.

Thus, signs that the Bank of England is gearing up for an interest rate raising cycle is seen as a positive for the GBP.

Governor Mark Carney said in a speech on Thursday, "Britain's economic outlook was much improved, and a rate rise was only a matter of time.

"The point at which interest rates begin to normalise is getting closer. In recent months the judgement about precisely when to raise rates has become more balanced. While there is always uncertainty about the future, you can expect interest rates to begin to increase."

Most economists expect the Bank of England to raise rates early next year, though a minority see a chance of an increase in November.
Britain's economy looks set to grow by more than 3 percent this year - faster than any other advanced economy - and unemployment has fallen to its lowest level since 2008.

Euro Exchange Rates to be Hammered by 1 Trillion EUR Stimulus

Where the Bank of England is seeng raising interest rates, the opposite is true of the ECB which is cutting rates.

Furthermore, the Bank has embarked on a policy of expanding its balance sheet - it has already promised to pump 400BN EUR into the economy over the next 3 years.

According to Deutsche Bank there could be more to come - a move that is certainly negative for the euro exchange rate complex.

"We have updated our ECB QE call. We now see it as more likely than not that the ECB will announce ‘broad-based asset purchases’, including public QE, within the next 6 months," says Mark Wall at Deutsche Bank.

Deutsche have reduced their euro area GDP forecast; the 2015 GDP forecast is now 1% versus 1.5% in June.

"We can no longer assume the output gap will narrow in 2015. We still expect inflation to trough in the very short term, but the growth picture combined with softer commodity prices is increasing the risk of a flatter profile to the inflation trajectory," says Wall.

Wall says he believes a net EUR 1 trillion expansion of the balance sheet is a strong enough policy to close the gap to the inflation target by 2017.

Furthermore, the falling euro exchange rate will then help boost the Eurozone economy as exports pick up.

"The strongest transmission channel is via a weaker euro exchange rate," says Wall.

Interestingly, Deutsche Bank don't believe quantitative easing would actually help the Eurozone as much as it has done in the United States:

"We continue to think that public QE – government bond purchases – is neither the solution of the euro-area malaise nor the most efficient monetary policy tool given the euro area economic and institutional characteristics.

"Private QE along with the AQR/stress tests could be a more efficient tool to address the causes of the persistent, material inflation undershooting.

"But with private QE offering insufficient size and politics constraining fiscal and structural policies, the ECB is being left with no choice but to push into public QE. Still, we would expect public QE to be less effective in the euro area than in the US."