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Euro to Pound Under Pressure BUT Sterling Should Recover Forecast ING

The euro has made strong gains against the pound sterling over the past 24 hours - but the move higher will have its limits warn analysts at ING.

Euro to pound sterling rate higher

The euro has powered higher as the ECB backs away from announcing any extension to its asset purchase programme. A clearly light UK economic calendar and lack of insight into Bank of England monetary policy have created a void in which the British pound has fallen.

The euro to pound sterling exchange rate (EURGBP) has also advanced thanks to decline in the GBPUSD rate. "With GBPUSD dropping so sharply the last few days EURGBP has rallied from channel support back to resistance. A break of .7340/60 could see the .7400-.7450 resistance zone tested, especially if sentiment in Germany surprises," say Lloyds Bank Research.

Can the euro's strength against the pound extend?

Don't count on it argue ING who have just released their latest research on the pair which eyes a decline back below 0.70.

Chris Turner, Head of Foreign Exchange Strategy at ING in London says he continues to look for a decline in the euro:

"Of European G10 currencies, we find short EUR/GBP and long GBP/SEK positions particularly attractive. In our view, GBP unjustifiably suffered following the market re-pricing of the Fed’s tightening cycle (both after the CNY devaluation and after the September FOMC meeting)."

The Dutch bank believes solid UK domestic data, coupled with hawkish BoE comments, suggest that speculation about the first rate hike should gain traction throughout the fourth quarter of this year and support GBP.

ING say they believe that the ECB needs a weaker EUR right now – and that given GBP constitutes about half of the EUR trade-weighted index, the ECB will be very sensitive to EUR/GBP strength.

"We expect EUR/GBP to test and break the 0.70 level as the market brings forward expectations of BoE tightening," says Turner.

Euro to pound weakness ING

Draghi Gives the Euro a Boost

The ECB appears intent to watch a few more weeks of Eurozone data before announcing any extension to its asset purchase programme.

Concerns that ECB President Draghi would announce an expansion, or drop some strong hints, to the European parliament in Brussels today proved unfounded.

"ECB president Mario Draghi communicated that oil prices, risks from emerging markets and the strong euro are still on the ECB worry list, therefore it is not going to sit back and watch everything get worse, but he sounded slightly less worried," says Piet Lammens, an analyst with KBC Bank in Brussels.

The euro fell in the first half of the week after a parade of senior decision makers at the central bank spoke up and threatened further quantitaive easing beyond the September 2016 deadline.

The noise has sent chills through currency markets which sold the euro.

We expect the euro to now hold the advantage as we move through the remainder of September - but be under no doubt - the ECB wants to see a lower exchange rate and they will likely continue trying to jawbone the shared currency lower.

Any strength in the euro to pound sterling exchange rate should therefore be seen as ultimately being temporary, in our opinion.

 

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