Is the Pound Euro Exchange Rate En-Route to 2008 Highs?

The UK's pound sterling has endured a solid run higher through much of 2014 with late September seeing GBP/EUR hit its stride after a mid-year soft patch.

Indeed, this past week has yielded the best rates of exchange of the year. However, as we head into the weekend we are seeing the pound sterling (GBP) head lower againt the euro. A lot of the move is certainly 'profit-taking' in nature and we expect the dip to be shallow.

Furthermore, corprates will be taking this opportunity to pick up the euro at discounted levels.

Looking ahead - where the pound to euro exchange rate (GBP/EUR) is headed next?

Analysis continues to point to the probability of further climbs for GBP at the expense of the EUR, but we urge caution on the potential for the current EUR bounce-back to extend further.

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Forecasting 2008 Highs to be Achieved

Bill McNamara at Charles Stanley is one analyst who reckons markets could ultimately see levels not seen in 6 years:

"The latest comments by BoE Governor Mark Carney have put the UK currency on interest rate alert and this led to a spike last week against most leading currencies (apart from the dollar).

"The chart shows that sterling is now just marginally below its 2012 peak at 1.285 and it is surely only a matter of time before this level is exceeded and it is back to levels that were last seen in 2008."

Further Pressure on The Euro to be Exerted by the European Central Bank

The ECB is expected by many to provide the fuel to the euro bonfire which is only going to burn brighter in coming months.

However, as always, timing is everything. Don't expect too much too soon:

"The ECB gives policy verdict on Thursday and is expected to maintain the status quo. Despite the escalating speculations for more ECB action, we believe that the ECB will likely wait-and-see the impacts of the recent stimulus," says Ipek Ozkardeskaya at Swissquote Research.

If markets are overly geared for action this could spark a fresh euro rally which will be sharp and could run further than many expect.

Nevertheless, longer-term more stimulus is likely, "the ECB’s balance sheet rebounds above 2 trillion euros through week ended on 26th September, yet there is still a long way to go before the balance sheet gets back to 2012 levels (roughly 3 trillion euros)."

"Mr. Draghi may be obliged to activate a Fed-like QE program (public debt purchasing) if the recent deterioration in inflation expectations continues."