GBP-EUR: 2016 Forecast From Commerzbank Sees Exchange Rate Gains Ahead

The British pound to euro exchange rate conversion appears to be at its short-term limit but researchers at Commerzbank see gradual climbs towards 1.45.

Latest: The Euro has fallen 0.9% overnight against the US dollar and 0.6% against Sterling after Greece was given 48 hours by the EU to come back with another new proposal.

Those with euro-based payments continue to take advantage of a strong pound sterling – particularly as we move through the latter half of June.

"Consensus expectations are the Euro could rally sharply if Greece strike a new debt relief deal. Markets should then pause to assess the longer-term implications." - Western Union.

The pound to euro rate (GBPEUR) is seen trading at the upper-end of what appears to now be a well-established sideways move which has dominated proceedings for the majority of 2015. The rate is seen at 1.4015 at the time of writing – we are at the upper limit of the range and short-term gains could well be capped as buying interest tends to stall at these levels.

Those holding out for even higher levels should be aware that patience must be exercised as the sterling’s period of outperformance may be coming to an end.

But, a new note issued by analysts at Commerzbank suggests that the pair will gradually rise into the latter half of 2015 and 2016.

The German bank believes sterling will under-perform a host of currencies into the latter half of 2015 based on a number of observations – but gains against the euro are forecast nevertheless suggesting that the euro could be the worst of the two.

Those with outstanding payments should aim to lock in the best possible exchange rate by placing orders with an independent specialist. For example, if 1.42 is reached they will transact automatically ensuring your desired rate is not missed.

Furthermore, the actual exchange rate delivered is likely to be closer to the real market rate than your bank would offer, this can deliver up to 5% more FX in some cases. Discover more here.

Sterling to Struggle (BUT Don’t Blame Brexit!)

Understanding why the outlook sees GBP underperformance requires an understanding of the reasons for GBP’s outperformance over recent times.

“The main reason for sterling’s relative outperformance in recent years, despite the twin current account and fiscal deficits, was due to the theme of disinflationary growth. Lower levels of inflation allied with higher GDP growth led to sterling’s outperformance,” says Commerzbank’s Peter Kinsella, quoted in a ‘Week in Focus’ note to clients.

Commerzbank believe that there exist some indications that by the end of this year, this theme will have run its course.

“Inflation is set to move higher, whilst growth so far this year has disappointed. Consequently the reasons for piling into sterling are no longer as strong as they previously were,” says Kinsella.

This will lead to some muted sterling underperformance over the medium term, in particular against the USD.

“Indeed, the BoE have been at pains to stress that the hiking cycle when it eventually comes will be a muted and tame affair. Put simply, there are many reasons for sterling to underperform in the medium term, but ‘Brexit’ is un-likely to be one of them,” says Kinsella who is quite adamant that blaming Brexit as an excuse for pound exchange rate depreciation is simply wrong.

Q1 Bank of England Interest Rate Rise

With regards to that much-anticipated first interest rate rise at the Bank of England Commerzbank are leaning towards consensus by calling the move in Q1 2016.

By way of contrast last week we reported that UniCredit are coming in bullish by calling a November rate rise.

Money markets are more sanguine with interest rate yield curves pricing a move in May.

Commerzbank’s Peter Dixon argues that while UK data has been improving, particularly wage rises, inflation remain an anchor to rates:

“Data releases have shown a little more robustness in recent weeks and the acceleration in real wages may embolden those MPC members for whom the decision on rates is “finely balanced” to start taking a more aggressive public tone on monetary policy.

“But although the CPI inflation rate last month moved out of negative territory, it is likely to hover around the zero line for a few months yet, which suggests that the MPC is unlikely to be in any hurry to act on rates.”

Pound v Euro Forecasts 2015 to 2016

Regarding the numbers being targeted, Commerzbank forecast the GBP-EUR at 1.39 at the end of the third quarter, rising to 1.40 by the end of 2015.

The first half of the year of 2016 will see the rate trade to 1.42 and by September 2016 we could be looking at an exchange rate of 1.45.