GBP/EUR Exchange Rate Could Fall to 1.40 Short-Term

The pound sterling has retreated back below 1.42 against the euro and is threatening a test of 1.40 in the near-term.

In general, the fundamentals of the UK are strong and they expect GBP to be a relative outperformer in G10. - Morgan Stanley.

We expect current weakness to extend ahead of the ultimate resumption of the longer-term pound / euro rally which the majority of forecasters believe will dominate trade into the year's end.

The decline in the pound to euro conversion (GBP/EUR) comes in the wake of the disappointing 'Super-Thursday' event at the Bank of England. We believe the event went as smoothly as it could have - markets had excitedly bid the pound higher in expectation of ground-shaking news on an early interest rate rise.

The Bank sailed a straight line though and confirmed an essentially unchanged outlook.

The pound exchange rate complex lost notable ground against the euro, US dollar and the full suite of commodity currencies. The record 20.00 rate against the South African Rand is now out of reach once more.

Despite the falls we hear that the prospect of a continuation of the GBP rally remains well and truly alive.

“Sterling dropped aggressively from 1.4320 to levels below 1.4200 before stabilising. In the conference call afterwards, Carney said that sterling has helped to hold back the need to raise rates, but at the same time has not taken away the need for a rate hike," says Chris Towner from HiFX.

Those with impending money transfers will have been punished for not hedging their exposure with a payments specialist. They may have to suck up lower rates, but should still seek rates that are up to 5% better than those being delivered by their banks if wanting to execute immediately.

How Far Can Sterling Go?

The short-term outlook has us turning to the charts for a clue on where the GBP to EUR is headed.

Momentumis breaking down with daily charts showing a break below the 20 Moving Average. Rejection just below 1.44 this week sees the upper end of a new range forming with support seen at 1.40. 

We are inclined to suggest declines to this level could be on the cards:

The Longer-Term Forecast: GBP Strength is Not Over

Despite recent events, for the pound sterling the outlook remains bright.

"The fact that the BoE’s inflation forecast continues to overshoot the 2% target at the three-year horizon is a signal that interest rates are still likely to rise somewhat earlier than financial markets expect, but probably not before year-end," says Daniel Vernazza at UniCredit in Milan.

We could in fact be witnessing to decent entry levels from which speculators could catch the next leg of the rally.

TD Securities have taken the opportunity to double-up on their pro-GBP stance:

Commenting is Ned Rumpletin at TD Securities:

“The GBP seems to be bearing the brunt of the adjustment, confirming our expectations that the FX market was ahead of rates markets in looking for a more hawkish stance from the MPC.

“We think the relatively large move in the currency is a function of long GBP positioning by shorter-term players who had approached this event expecting a more overtly hawkish outcome.

“We remain bullish on the GBP overall, however, and view this as only a temporary setback.”

 Morgan Stanley are also confident of the pound's longer-term prospects reminding markets that in general, the fundamentals of the UK are strong and they expect GBP to be a relative outperformer in G10.

"We like GBP against the commodity currencies and remain long GBPNOK in our Strategic FX Portfolio. However, we have converted our short EURGBP position into short EURSEK," says Morgan Stanley.