Pound Forecast to Fall to 1.25 Ahead of 1.21 v Euro Warn Lloyds
The pound to euro exchange rate (GBP/EUR) is heading towards the lower end of its recent ranges which spells trouble for those wishing for a better rate of exchange.
- Sterling takes fresh hit from downgrade to UK labour productivity forecasts in 2016 budget
- Lloyds Bank technical analysis shows 1.25 then 1.21 are next targets
- But keep in mind that 2016 could yet be a bad year for the euro
The UK currency did not take kindly to news contained in the 2016 budget that the UK's Office for Budget Responsibility had downgraded forecasts for UK labour productivity.
Labour productivity is a key part of the pound's puzzle, more details on why here, and only serves to add to the negative narrative on GBP at present.
Where will GBP go next then?
The structure of the market, as indicated on the currency's charts, gives us some clues as to the next likely targets.
According to analyst Robin Wilkins at Lloyds Bank, the longer sterling remains unable to break higher out of its current range, the stronger the influence of the downward-sloping technical drivers become.
As we can see the GBP to EUR pair remains trapped in a range between 1.3072 and 1.2618, and that we are heading to the bottom of the range spells trouble for those who were holding out for a stronger pound:
“The longer this range plays out the more likely it becomes that we still see a move towards key long-term channel and Fibonacci support in the 1.25-1.2195 region,” warns Robin Wilkins at Lloyds Bank.
According to Wilkins, at this stage a rise through 1.3071 is needed to suggest further near-term strength to test more important resistance in the 1.3245-1.3423 zone.
Latest Pound/Euro Exchange Rates
  | Live: 1.1391▼ -0.13%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1004 - 1.1049 |
**Independent Specialist | 1.1232 - 1.1277 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
The Range May Hold
Perhaps the support zone seen at 1.26 will halt declines?
Advocating for ‘more of the same’ is Stéphanie Aymes at Societe Generale who notes the significance in the pullback in GBP/EUR after testing key resistance at 1.4285/1.4706.
Aymes says the ongoing decline “looks similar to previous ones in terms of timing ratios and is about to complete a typical span of seven months to a year.”
If Aymes is right, the technicals could chime with the fundamental forecasts held by the world's leading institutions that suggest the worst of the downside in sterling-euro has now passed.
A vanquishing of resistance at 1.33/1.3422 will decide whether a stronger advance is able to shape up.
EU Referndum Raises its Ugly Head, Sterling Falls
After taking a two week sojourn the best that is the EU referendum is back and spooking sterling.
Sterling surrendered its best exchange rate against the US dollar since mid-February as Brexit uncertainty returned to the fore.
A poll showed the ‘out’ side with a lead ahead of the June 23 referendum on Britain’s EU membership.
"The spectre of an EU without Britain, and vice versa, fans a critical thing markets loath: uncertainty – which is tantamount to negativity for a currency," says Joe Manimbo at Western Union.
The Contrarian View: 2016 Could Still See the Euro Fall to Parity
Maybe our tone on sterling is too negative and the outlook for the GBP/EUR is actually not as bad as we are making out.
We have to keep these scenarios, that go against consensus, in mind as they tend to be the most damaging when we are shown to be unprepared.
With that in mind it is important to stress the euro faces significant challenges going forward with one major forecasting suggesting it could even fall to parity against the US dollar in coming months.
Such a hefty slump would surely keep the pound sterling supported against the euro as it implies the shared currency faces notable challenges and weakness.
“We remain bearish on EUR on a structural basis, looking for a move to parity against USD by the end of the year,” say Morgan Stanley in their latest major FX forecast briefing to clients.
The investment bank’s bearishness towards the euro rests primarily on three pillars:
1) European bank weakness owing to highly leveraged balance sheets
2) The ECB will act further over coming months
3) Politics will hit the euro, particularly those surrounding the refugee crisis
As such, Morgan Stanley are forecasting the pound to euro to trade at 1.3698 by the middle of 2016.
The rate is expected to end the year at 1.31 though, nevertheless, this is certainly higher than where we are presently.
