Sell Euro Rallies vs the Pound Say Tactical Forecasters at Barclays and Deutsche Bank

The euro to British pound exchange rate (EUR/GBP) is forecasted to fall in longer-term timeframes by two major banks who recommend a 'sell on gains' strategy.

Tactical analysts at Barclays and Deutsche Bank have told clients they favour positioning for further declines in the euro and the best possible currency to execute this view is the British pound (GBP).

This will mean that spikes in the EUR/GBP, as witnessed this week, present traders with an opportunity to profit on any extension of the longer term downtrend in place for much of 2014.

• At the time of writing the euro pound rate is trading 0.10 pct higher at 0.7889.
• The pound to euro (GBP/EUR) is at 1.2678.

Be aware that the above is a spot market quote, your bank will charge a discretionary spread charge, however an independent specialist will seek to undercut your bank's offer. This can deliver up to 5% more FX in some instances.

Sell the euro against the pound sterling say the analysts

• Deutsche Bank's forecast:

"Market pricing of the Bank of England has become too dovish relative to growth and wages. Will break-evens collapsing, the ECB will have to deliver additional monetary easing.

"This should help rate differentials move in favour of a lower EUR/GBP."

• Barclays' forecast:

"Our economists pushed forward the timing of first hike by the BoE from November 2014 to February 2015, but our constructive view on the UK economy remains intact and we believe the market is pricing in too much dovishness from the BoE.

"Our view on relative monetary policy between the BoE and ECB – that the former to start policy normalisation while the latter to announce EGB QE in Q1 2015 suggests that EURGBP will continue to decline in coming months.

"Our forecast for Euro area and UK data this week is mixed relative to consensus, but we prefer selling EURGBP on any rallies."

But Risk Lies Ahead

Longer-term predictions continue to favour sterling over the euro due to the outperforming UK economy.

However, anyone banking on an unadalterated run higher by the GBP will be sorely disappointed.

Near-term markets are incredibly tricky to play; particularly when it comes to sterling which has seen hightened volatility recently.

Analysts at Western Union note:

"Buying sterling today offers the assurance of one of the best markets in nearly a year. Sterling neared recent 11-month lows after downbeat news on U.K. consumers offered more evidence of an economy on the downshift.

"British retail sales underwhelmed with a 0.3 percent fall in September, confounding forecasts of a smaller decline. Weak data buy the Bank of England time to keep borrowing rates low, weighing on the pound. More risk and uncertainty lies ahead for sterling with preliminary U.K. growth due Friday.

"Forecasts call for Europe’s third biggest economy to grow at a slower pace of 0.7 percent in the third quarter, down from 0.9 percent in the second quarter."

Is the Worst of the Decline Over for GBP/USD?

Turning to the pound dollar exchange rate:

Fair value estimates for sterling derived on the back of rate spreads and measures of risk are starting to suggest that the worst of the selloff is behind us says at note from CitiFX.

Commenting on the GBP/USD's outlook Citi say:

"Absent significant deterioration in risk sentiment and UK data from here the pound could recover some more. The BoE minutes next week could highlight that policy rates may start going up earlier than currently expected by the market.

"Cable could regain more ground especially if US CPI print comes on the soft side on Oct 22. We may have seen the lows for sterling against the euro as well."

Meanwhile, the ECB confirmed that it began purchasing covered bonds yesterday and will reveal how much it purchased every Monday afternoon and that the purchases of ABS are expected to begin later this year.

"Still with downside risks to inflation and growth in the euro-zone continuing to build, the ECB remains under pressure to deliver further easing which if delivered could trigger renewed euro weakness," says Bank of Tokyo-Mitsubishi.