GBP/EUR Rate Forecast to Peak at 1.44 in 2015 by Lloyds Exchange Rate Forecasters

As we enter the middle of 2015 we take stock of the British pound to euro exchange rate and hear from two leading institutional researchers that while there are better exchange rate levels ahead the euro will ultimately recover.

- "End-2015 targets for GBP/USD at 1.54 and EUR/GBP at 0.69" - Lloyds.

- Sterling falls against euro in mid-week trade as resistance zone fails to yield confirming gains will be slow to come.

Analysts at Lloyds Bank have told clients they are raising their forecasts for the British pound against the euro - however those looking to make currency payments must be aware that the peak in the exchange rate will likely happen in before the end of the year.

The pound sterling has risen against the euro through the course of May with the low point of 1.3362 being quickly forgotten as electoral uncertainty was swept aside by the Conservative victory. The GBP-EUR pair is now looking ready to test the 1.42 region once again with momentum indicators currently advocating for further gains.

However, in mid-week trade we have seen the British pound slump half a percent against the euro taking it back towards the 1.40 marker confirming just how hard it will be to breach resistance at 1.41. The pound to euro exchange rate has proven time and again that it struggles to attract fresh buying interest at levels around 1.41 with many in the market considering anything higher to be too expensive.

The GBP is weak across the board with no real reason for the selling pressure. This confirms that technical levels are important for traders and the failure at 1.41 explains much of the weakness in GBP-EUR.

Fundamentally Speaking...

That said, fundamental analysts at Lloyds Bank see no reason to doubt that the GBP to EUR will achieve a level of 1.44 in 2015. In their latest monthly exchange rate forecast note Lloyds Bank tell us they are raising their near-term sterling profile on the back of the eradication of the political muddle a new coalition or minority government would have posed.

Furthermore, Lloyds are predicting the Bank of England will raise interest rates in 2015. Interest rate moves remain front and centre for currency valuations at the moment – global money flows to where higher interest rates offer higher yields to investors.

Explaining what this means for the British pound v euro exchange rate, Lloyds tell their clients:

“We have left our central US and UK policy rate ‘lift-off’ dates unchanged at Q3 and Q4 this year, respectively. However, we have moderated the pace of tightening in the US and now see only one 25bps (previously 50bps) rise this year to 0.5% and 75bps (previously 100bps) of increases in 2016 to 1.25%. For the UK, we continue to see one 25bps rise this year to 0.75% by end-2015 and 50bps of rises next year to 1.25%.

"We concede, however, that the risks of a first move coming slightly later than our Q4 forecast have risen over the past month.

“The removal of UK post-election uncertainty in the formation of a viable government means that we have revised up our near-term sterling FX forecasts, but we have left unchanged our end-2015 targets for GBP/USD at 1.54 and EUR/GBP at 0.69 (or GBP/EUR at 1.44).”

As we can see from the below, 1.44 could well be the high point for the exchange rate as the impact of ECB quantitative easing starts to boost the Eurozone economy:

Danske Bank Also see an Interest Rate Rise this Year

Backing the Lloyds prediction for a GBP-positive interest rate rise at the Bank of England in 2015 is Danske Bank who believe the return of rising inflation will force the Bank to act:

“We expect the MPC to hike in November this year. Although headline inflation is likely still to be low at this point, we think that the MPC members will judge that the medium-term inflation outlook calls for tighter monetary policy.

“It is important to remember that the low inflation is mainly due to falls in energy and food prices, which should begin to drop out at the end of this year. We still expect the BoE to increase interest rates at a very modest pace, taking the Bank Rate to 1.5% by the end of 2016.”

Danske Bank hold a similar forecast profile for the euro v pound sterling noting that declines lie ahead but an improvement in the euro’s position in a year’s time will see a recovery take place in the shared currency.

“Looking further ahead, the combination of additional EUR weakness caused by the ECB’s ‘hot potato effect’ coupled with re-pricing of the BoE should keep EUR/GBP under pressure in the coming months and we target EUR/GBP at 0.69 in 6M,” say Danske.

Turning the exchange rate equation around, this is GBP/EUR at 1.4493 in 6 months.

“On a six- to 12-month horizon, we expect EUR/GBP to stabilise and to eventually move higher as the eurozone recovers and as eurozone inflation is set to pick up significantly. This should cause EUR downside to fade and we target the cross at 0.71 in 12 months,” say Danske.

This equates to 1.4084 in 12 months.

If Lloyds and Danske are to be believed then those with a euro purchases in coming months should instruct their providers to execute at 1.44 – this could well be as good as it gets and such an opportunity should not be ignored.