GBP/EUR: When will Strength Return?

A new set of forecasts confirm that the current batch of GBP-EUR weakness will be temporary in nature.

The euro has made a comeback against the British pound through March and April 2015. At the weekend we note GBP suffered fresh falls on the final day of the week courtesy of some weaker-than-expected industrial production data.

Many of those watching the currency markets for a higher GBP will be wondering if they have missed the boat with the 2015 highs above 1.40 being a distant memory.

Not to worry, suggests one leading investment bank who have calculated that the current bout of strength in the euro is likely to be temporary.

This chimes with the view we published earlier; we may have already seen some solid support form to counteract any further GBP weakness.

The charts in that piece suggest we would only begin to expect further declines if 1.35 is breached. The preferred near-term outlook is one that sees a period of consolidation, particularly through the UK election period.

Be conscious that all FX quotes in this piece reference the wholesale markets rates - your bank will affix a discretionary spread to this wholesale rate to derive their profit. However, an independent FX provider will undercut your bank's offer, this can deliver up to 5% more currency in some instances, learn more here.

Has the Best GBP-EUR Rate Passed?

Lloyds Bank Research, as shown in this report, have suggested that sterling has already peaked against the euro.

If you are to subscribe to this view you would likely be accepting that the Eurozone’s woeful economic performance of recent months and years has now come to an end.

Furthermore, you would likely be accepting that the full extend of the ECB’s quantitative easing programme has been fully priced into EUR valuations.

We countered the viewpoint that the ‘best has come’ with the observation that ahead of the financial crisis of 2008 the GBP-EUR exchange rate traded in an historical region above 1.4 and below 1.5.

Our argument is that the pound euro rate is currently making its way back to this zone as the UK economy stabilise.

The latest forecasts from TD Securities shows that a rate of 1.47 in GBP-EUR will be achieved at mid-year 2016, lending itself to this view.

Analysts at the bank see this as the best exchange rate to become available over the course of the next two years as from here the euro will start to strengthen once more.

Near-Term Euro Strength

The euro has outperformed in March/April as the brutal selling pressures of recent months fade.

The losses have been spectacular in nature and there existed an air of inevitability with regards to a euro comeback.

We are seeing that play out.

Analyst Richard Kelly at TD Securities points out they priced in a drop to as low as 1.33 in the second quarter of 2015.

While this appears to be a drop too far it does highlight the thinking that the British pound to euro exchange rate was due a decline.

Oversold conditions in the EUR need to be unwound, this has in turn been justified by the observation that Eurozone economic activity is picking up.

Inflation is also not falling as fast as many had anticipated; if inflation starts to show a stubborn resistance to further declines the ECB may have to scale back on its EUR-negative quantitative easing programme.

Beware, Politics Ahead

Further declines in sterling-euro could yet be realised however.

“BoE sensitivity to the GBP's impact on inflation and uncertainty regarding the May general election outcome will serve to temper the recent appreciation in the pound in the short-term at least. EURGBP may give back another 2-3 cents of the recent decline ahead of the May vote,” says Kelly.

This view forwarded by TD Securities echoes a similar view at Barclays.

Strategists at Barclays are forecasting further declines in the GBP-USD rate as we head into a period of political uncertainty.

But GBP will Find its Feet Once More

Once a new regime is in place we should see sterling bid higher on the back of stability.

Provided an economically-friendly government is installed we should see the UK economy continue to outperform that of the Eurozone.

From the second half of the year the euro is forecast to succumb to sterling strength however.

“The case for longer-term depreciation in the EUR remains strong; ECB balance sheet expansion and relatively weak growth should keep the EUR trading defensively over the balance of the year,” says Kelly.