TD's GBP/EUR Forecast Sees Recovery to 1.50 in 2016

The pound sterling could restart an uptrend against the euro over coming months and deliver the best exchange rate in years.

The pound is forecast to advance against the euro over the next 12 months according to analysts with TD Securities.

The investment bank’s views come at a time when the exchange rate is struggling with a number of institutional analysts are seen downgrading their forecasts for the pair.

Amongst the less-than-optimistic analysts are Lloyds Bank who are expecting to see a lower exchange rate in a year’s time while S.E.B say the pound’s strength is ultimately likely to fade soon; the Swedish bank suggests the pound could be overvalued to the tune of 18% on a real trade weighted basis.

The call for a higher pound sterling at TD Securities will be welcomed by those looking for a higher GBP/EUR rate, particularly in the present environment in which the rate is struggling around the 1.35-1.37 band.

TD Securities’ analyst Richard Kelly says:

“Over the medium-term, we are constructive on GBP but a post-Fed lull period suggests that cable price action will be choppy. With the Fed still on hold, we think the MPC will remain patient, leaving GBP vulnerable to positioning risks.

“Further out, we prefer to own GBP vs the EUR and commodity crosses, particularly versus CAD and NZD but for now we are tactically neutral.”

Kelly believes the market are missing a trick when it comes to pricing in that all-important first interest rate rise at the Bank of England.

Interest rate differentials are incredibly important to foreign exchange rates and the pound will find strength on signs that the Bank of England will move on rates as soon as possible.

The market has started to push back the odds for the first rate rise into Q3 2016.

“It is too early to aggressively fade, but without worse data, that pricing will likely be hard to justify,” says Kelly.

The analyst cites real wage growth, currently at 7-year highs, and confidence at multi-decade highs as being key reasons to believe the Bank of England will soon act on interest rates.

Household spending is likely to be key to growth going forward and inflation is forecast to pick up sharply over coming months.

These observations make for a stronger sterling to euro conversion in the opinion of TD Securities.

TD Securities are forecasting the EUR/GBP to fall to 0.71 by the end of 2015, 0.67 by mid-2016 and 0.68 by the end of 2016.

Turning the equation around to reflect the pound to euro the figures equate to 1.41, 1.49 and 1.47 respectively.

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