GBP/EUR Exchange Rate Limit Could be at 1.45 Before 2016 Decline

The good times for those using the pound sterling to buy euros will have a limit warns a new exchange rate forecast from Lloyds Bank.

Having fallen from over 1.40 to 1.35 towards the end of May, GBP/EUR has recovered back above 1.40 bringing relief to those with outstanding euro payments.

At the time of writing the British pound to euro exchange rate is seen at 1.4060 and appears to be struggling to break to yet higher levels as buying interest wanes at key resistance levels.

Concerns over the deteriorating Greek situation and investor portfolio shifts out of the euro have played some part in the pound’s recent outperformance over its continental cousin.

“The main drivers, however, have been the relative improvement in the UK economic data and associated widening in UK/EUR rate spreads. Early indications from April and May activity data suggest UK Q2 GDP is likely to expand by around 0.7%, compared with around 0.4% in the Eurozone,” note Lloyds Bank who have released their June suite of economic forecasts.

That, coupled with a strong rise in UK pay growth in the latest three months, has led the market to bring forward its expectation of the first rise in UK Bank Rate.

The prospect of higher UK interest rates have exerted upward pressure on the pound to euro currency conversion which has improved from 1.11 in 2011 to the 1.40 we are seeing today.

Lloyds are suggesting that further gains could be delivered by the pound sterling but lingering for too long could prove costly for those with large payments to the Eurozone.

“Looking ahead, the direction GBP/EUR takes will depend crucially on how events in Greece unfold. On balance, we expect continued Greek event risk, stronger UK data and rising UK rate expectations to push GBP/EUR above 1.45 over the coming months, before the euro stages a broader recovery in 2016,” say Lloyds.

Further gains could come for GBP/EUR as the Eurozone remains beset by Greek-related uncertainty and a waning in economic performance.

Eurozone economic momentum has waned from earlier in the year, in part as the euro has rebounded from the lows and political risks have multiplied.

Recent business sentiment data from Germany suggests less momentum into Q2.

As such the ground for a higher exchange rate in the second half of 2015 remains on course but those looking for higher rates should be reminded that Eurozone is widely expected to start recovering in 2016 allowing a comeback in the euro exchange rate complex.