Euro-Pound Forecast for Those Making International Payments in August

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The broader backdrop is one that favours pound sterling over the euro, given the relatively elevated interest rate environment in the UK compared to the Eurozone.

A robust economy - despite seemingly perpetual expectations of imminent recession - and improved political dynamics in the UK means those downside shocks to the pound that have featured over recent years are greatly diminished.

Such political dynamics are explored in more detail here and include maximum divergence with the EU having passed, both main political parties being headed by centrists, and economic orthodoxy being back in vogue.

"GBP is the best performing currency in the G10 space YTD, surprising many investors," says Yvan Berthoux, Strategist at UBS. "Gains have been primarily driven by a hawkish BoE and easing political uncertainty, alongside resilient economic data."

In the absence of shocks, the pound can strengthen over the medium- to longer-term and a break below support at €0.85 is possible over the next three months.

However, the euro to pound rate's (EUR/GBP) downtrend has stalled as Bank of England interest rate hike expectations retreat, offering those selling the euro some relief.

Above: EURGBP at daily intervals, with potential movement annotations for the nearer and medium terms.

Further strength could be in store Thursday when the Bank of England is tipped to raise interest rates again.

Institutional analysts we follow at Goldman Sachs and Société Générale say anything but a 50 basis point hike could result in GBP weakness and the odds of such a move have receded since last month’s below-consensus inflation print and other surveys suggesting UK inflation is set to fall further.

A spike in EUR/GBP on a 25bp hike on Thursday is therefore possible, particularly if the Bank of England signals it is close to where it wants to be on interest rates.

August is also an unfavourable one for the pound on a seasonal basis. "The Pound usually has an awful August," says George Vessey, FX Strategist at international payments firm Convera. "August has kicked off on a sombre note for the pound... looking back at the past 20 years, this may not come as a big surprise."

Rallies to the July high at 0.87 are therefore a near-term possibility but note EURGBP has been unable to close above 0.8660 since May.

A daily close above this resistance point could suggest levels above 0.87 are possible in August.

Risks to this call are a determined Bank of England that is still smarting from being accused of being behind the curve on inflation and interest rates that push it into another 50bp hike.

Equally, a 25bp hike with a unanimous vote and unchanged guidance can be supportive of GBP once the initial selloff that would great a 25bp move fades.

Another risk to EURGBP falls on August 16: if the inflation report tops expectations the EURGBP can fall fast. Equally, a softer print can boost EURGBP.

But circling back to the opening points: this is an exchange rate that looks as though it wants to be lower by the time the year is out and the best opportunities for euro sellers look to be in closer timeframes.