As Central Banks Abandon the Euro the GBP to EUR Rate Could Benefit

Analysts confirm the British pound (GBP) will remain preferred to the euro as we head through the final months of 2014, however forecasts warn that some levels will be hard to break.

The pound continues to sit at inter-year highs against the euro as markets turn away from the shared currency on expectations of further easing action being announced at the European Central Bank.

Indeed, the ECB appears determined to push its balance sheet back to levels last seen in 2012. This flood of euro's to the market will see the currency remain under pressure.

At the time of writing the pound to euro exchange rate (GBP/EUR) is seen trading 0.22 pct higher. 1 GBP converts into 1.2738 EUR. See charts and historical data here.  

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Outlook for the Euro: Everyone is a Seller

The positive case for direction in the pound to euro exchange rate going forward lies largely with the negativity that continues to be directed at the shared currency.

"It seems that everyone’s lining up to sell the euro. Central banks were part of that rush, with latest IMF figures showing a large decline in allocated reserves held in euros during the second quarter of the year," says CIBC World Markets in an exchange rate forecast note to clients.

For the single currency, its proportion of central bank holdings has dropped since the recession and early part of the recovery, with those institutions clearly questioning whether it is in fact a true alternative to the US$.

"Any further movements away from the euro will only add to downward pressure, particularly against the greenback," say CIBC Markets.

Outlook for the British Pound: It's All About Rate Hikes

"Working for a national statistics agency isn’t always rock-and-roll. Yet interest in the UK’s Office for Naional Statistics has perked up in recent months as it sought to include darker areas of the economy, such as prostitution and drugs trade, in its GDP estimates," say CIBC Markets in a note to clients.

But as well as being a headline writers’ dream, the new figures have also sparked interest at the Bank of England.

As of now, the UK economy is 2.7% larger than its pre-recession peak. Before the revisions process began, it was only 0.4% higher.

"That seems like a pretty significant change, however we’re not bringing forward expectations of rate hikes as a result, as it hasn’t affected measures of slack in the economy," say CIBC.

Analysts reckon that because of these unchanged rate expectations the UK unit will likely lag against the dollar.

However, a rate hike at the BoE contrasts significantly to the ECB which is headed in the opposite direction when it comes to interest rates.

Hence, we see the pound to euro exchange rate offering yet further downside.

HSBC: Backing the US Dollar Higher

Meanwhile, all eyes remain centred on the US dollar's bull run which currently shows no signs of abating.

HSBC Holdings have told clients they have raised their forecasts for the dollar:

"Our G10 forecasts have long encompassed a bullish USD theme, so the modifications here are ones of magnitude rather than direction.

"On this basis, the divergence in monetary policy between the Fed and the ECB will likely see EUR-USD much lower.

"Our forecast for the end of next year is 1.19, and the downside might be larger if we did not anticipate some push-back from US authorities against too swift a rise in the USD.

"After a fall from 1.40, one could argue that the prospective divergence in policy is already in the price of EUR-USD, but there is likely still a high level of market scepticism about whether the ECB will ultimately deliver full-blown QE."

"We believe they will, and so there is a further adjustment lower in the EUR to come."