Why CIBC See Even More Pound v Euro Exchange Rate Strength Ahead

Interest rate and currency markets may be under-estimating the strength of the UK’s economic performance.

"We would again underline that we view the rates market as remaining too complacent."

This is the viewpoint of analyst Jeremy Stretch at CIBC World Markets who suggests the pound to euro exchange rate conversion should track higher as markets align with the economic fundamentals.

The view will be welcomed by those watching the foreign exchange markets with the view to buying euros at a higher rate.

“While we have seen Sterling softening, amidst a degree of implied rate relief, (implied rates are modestly higher across the curve) we would again underline that we view the rates market as remaining too complacent, not least as the May NIESR GDP indicator has rallied, post Q1 weakness, to post its highest reading in four months, at 0.6%,” says Stretch.

The return to stronger levels could well be under way - converting pounds into euros is done so at 1.3863 on the inter-bank markets.

High street banks are passing on a lower rate at an average of 1.3475 for international payments while we are being quoted 1.3697 by independent payment specialists.

GBP v EUR Upside Impetus Forecast

CIBC’s Stretch says he believes the UK economy is picking up speed following the slow start to the year and despite the prospect of additional fiscal tightening from the new Conservative government.

The uptick in the NIESR reading, allied with a continued uptrend in housing prices, the RICS house price balance has advanced to the highest level since August, ties in with our assumption of rate expectations remaining too flat.

Regarding the outlook for the euro, CIBC do not ascribe to the theory that fiscal tightening obviates the need for the BoE to act until well into ’16.

“Hence we remain biased towards looking for GBP impetus in the crosses, with against the USD being the likely exception. For EURGBP look for a close below the 100-day MAV at 0.7285 to encourage a break of 0.7250,” says Stretch.

This target in pound to euro terms equates to 1.38.

Sterling strengthened against the euro on the back of positive industrial production data mid-week which saw the headline number increase 0.4% despite a 0.4% contraction in manufacturing figures.

We get the sense that the GBP/EUR is now in such a well-established range that it would take something quite eye-opening for the pound to weaken beyond 1.35.

However, risks are certainly biased to the upside - long-term momentum favours the GBP and if the UK economy keeps moving forward as it currently is then the break above 1.41 will occur long-term.

Indeed, four of the leading forecasters we follow see the GBP-EUR above 1.44 in one year’s time and trading at least at 1.43 by the year end.