Danske Bank Confirm GBP/EUR is Yet to Hit 2015 best
- Written by: Gary Howes
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Danske Bank have are bullish on the prospects facing the pound to euro exchange rate (GBPEUR) despite recent falls.
New exchange rate forecasts from Danske Bank confirm GBP/EUR is yet to hit its 2015 best.
This will come to a relief to those watching currency markets in anticipation of a new 2015 record following events over the past 24 hours.
All hopes for levels above 1.44 were dashed by the Bank of England on Thursday the 6th when they denied they were looking to raise interest rates before the end of the year.
For a currency market obsessed with interest rate levels this was taken as a negative for sterling.
We have since seen the pound to euro exchange rate conversion fall; we could see the pair decline to 1.40 in the near-term.
However, fundamental reality dictates a higher exchange rate will prevail argue Danske Bank who have furnished clients with their latest projections.
“EUR/GBP still trades 1.3 standard deviation above our model’s short term estimate of 0.69. Fundamentally, we still expect EUR/GBP to trade lower in the coming months driven by relative interest rates. We target the EUR/GBP at 0.69 in 3M to 6M but stress that the risks remain that the cross temporarily undershoots our targets,” says foreign exchange analyst Mikael Olai Milhøj at Danske Bank.
For those wanting to turn the rate around into 1 GBP to EUR terms, 0.69 represents 1.4492.
Concerns that the pound sterling is overbought may be justified if we consider that the pound, from a trade-weighted perspective, is a whopping 6% higher than it was at the start of the year.
Can the trend higher continue or must the markets stabilise to a more gradual rate of increase?
Studies of how investors are positioned suggest the British pound is not overbought argue Danske who say non-commercial positioning is fairly neutral, according to the latest IMM positioning data.
Neutral positioning suggests that there is the capacity for enough outstanding currency resources to back the GBP to further highs – this would not be the case if the position was over-subscribed.
“Hence, there should room for further GBP longs to be added,” says Olai Milhøj.
Losses Against the Dollar
While gains against the euro are likely, the same strength aganist the US dollar is likely to prove elusive.
Danske say relative rates are also expected to be an important driver for GBP/USD in H2.
"Based on our interest rate forecasts, where we expect the Fed to hike in September, the repricing of 2Y US interest rates is expected to much larger relative to the 2Y segment in UK. In fact we expect the rate spread to change sign in the coming months going from 20bp today to -10bp in 6M. Even if the Fed hikes later this year, the 2Y swap spread should still narrow substantially. We target GBP/USD at 1.51 in 6M," says the Nordic bank.
The British Pound Outlook: The Week Ahead
TD Securities’ Ned Rumpletin sets us up for the upcoming week in the UK:
1. June Unemployment (Wed 12 Aug):
"The 3MMA unemployment rate bounced off a post-crisis low in April, ticking up to 5.6% in its May release. We see the rate holding here for the three months to June, as claimant counts have held relatively stable in recent months. This places us largely in line with the consensus view, as well as the just-published Inflation Report forecast, which expects the unemployment rate to hold at its current level through September."
2. July CPI (Tue 18 Aug):
"Annual CPI growth has been hovering around zero percent since February this year, largely on account of weak commodity prices and GBP strength. We anticipate next week’s print to be in line with recent months, at 0% y/y, as these factors are expected to continue weighing through most of 2015. Core inflation, too, has remained relatively soft in recent months, and we expect just a minor up-tick from June’s 0.8% y/y reading to 0.9% y/y in July."
3. July Retail Sales (Thu 20 Aug):
"With low headline inflation and recent wage and productivity growth supporting healthy growth of real household incomes, we expect June’s negative retail sales reading to be just a blip. We expect a small increase coming for July. Recent surveys show households are more confident about further income increases, and consumption growth has been gaining momentum over recent quarters, so we don’t see this trend reversing in the near-term."
